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A Model of Arbitration in Regulation

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  • Juan-Pablo Montero

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

I study a regulatory process in which both the regulator and the regulated firm propose prices that in case of disagreement are settled through final-offer arbitration – a practice currently used in Chile for setting prices in the water sector. Rather than submitting a single offer, each party simultaneously submit offers for each of the cost units in which the firm is divided. This multiplicity is believed to be responsible for the great divergence between parties’ offers observed in practice. I show, however, that reducing the number of offers makes little difference unless parties are required to submit a single offer.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 267.

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Date of creation: 2004
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Publication status: Published as "A Model of Final-Offer Arbitration in Regulation", Journal of Regulatory Economics Nº 28, pp. 23-46, 2005.
Handle: RePEc:ioe:doctra:267

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Keywords: Final-offer arbitration; price regulation; Nash equilibrium;

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  1. Vogelsang, Ingo, 2002. "Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective," Journal of Regulatory Economics, Springer, vol. 22(1), pages 5-27, July.
  2. Orley Ashenfelter & David Bloom, 1981. "Models of Arbitrator Behavior: Theory and Evidence," Working Papers 526, Princeton University, Department of Economics, Industrial Relations Section..
  3. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, Econometric Society, vol. 54(4), pages 819-44, July.
  4. Ashenfelter, Orley, et al, 1992. "An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1407-33, November.
  5. Robert Gibbons, 1988. "Learning in Equilibrium Models of Arbitration," Working papers 485, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Henry S. Farber & Max H. Bazerman, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes."," NBER Working Papers 2139, National Bureau of Economic Research, Inc.
  7. Farber, Henry S & Bazerman, Max H, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(1), pages 99-120, February.
  8. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1503-28, November.
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