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The Chilling Effect Of Optimism: The Case of Final-Offer Arbitration

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  • David Dickinson

Abstract

This article examines the incentive effects of final-offer arbitration (FOA) in the presence of optimistic disputants. Common disputant expectations about the likely arbitrator settlement preferences are not a necessary condition for equilibrium final offers. It is shown that equilibrium final offers can exist under at least two forms of disputant optimism, naïve optimism and more sophisticated beliefs. Additionally, equilibrium final offers diverge more when disputants are optimistic than when they are not, and even more when optimism is naïve as opposed to sophisticated. The implication is that FOA rules, though instituted to lessen the chilling effect of arbitration on negotiations, interact with optimistic beliefs in a way that worsens the chilling effect. Data from controlled laboratory experiments confirm that optimistic expectations increase the distance between the disputants final bargaining positions as well as the probability of dispute. These results highlight the importance of improving disputant expectations as an effective way of improving bargaining outcomes.

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File URL: ftp://repec.bus.usu.edu/RePEc/usu/pdf/ERI2003-01.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by Utah State University, Department of Economics in its series Working Papers with number 2003-01.

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Length: 22 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:usu:wpaper:2003-01

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  1. Ashenfelter, Orley, 1987. "Arbitrator Behavior," American Economic Review, American Economic Association, vol. 77(2), pages 342-46, May.
  2. Babcock, Linda & Wang, Xianghong & Lowenstein, George, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 1-19, February.
  3. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  4. Ashenfelter, O. & Currie, J. & Farber, H.S., 1990. "An Experimental Comparison Of Dispute Rates In Alternative Arbritation Systems," Working papers 562, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Pecorino, Paul & Van Boening, Mark, 2001. "Bargaining and Information: An Empirical Analysis of A Multistage Arbitration Game," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(4), pages 922-48, October.
  6. Steven J. Brams & Samuel Merrill, III, 1983. "Equilibrium Strategies for Final-Offer Arbitration: There is no Median Convergence," Management Science, INFORMS, INFORMS, vol. 29(8), pages 927-941, August.
  7. 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.
  8. Babcock, Linda, et al, 1995. "Biased Judgments of Fairness in Bargaining," American Economic Review, American Economic Association, vol. 85(5), pages 1337-43, December.
  9. Bolton, Gary E. & Katok, Elena, 1998. "Reinterpreting Arbitration's Narcotic Effect: An Experimental Study of Learning in Repeated Bargaining," Games and Economic Behavior, Elsevier, vol. 25(1), pages 1-33, October.
  10. Steven J. Brams & Samuel Merrill, III, 1986. "Binding Versus Final-Offer Arbitration: A Combination is Best," Management Science, INFORMS, INFORMS, vol. 32(10), pages 1346-1355, October.
  11. Farmer, Amy & Pecorino, Paul & Stango, Victor, 2004. "The Causes of Bargaining Failure: Evidence from Major League Baseball," Journal of Law and Economics, University of Chicago Press, vol. 47(2), pages 543-68, October.
  12. Loewenstein, George, et al, 1993. "Self-Serving Assessments of Fairness and Pretrial Bargaining," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 22(1), pages 135-59, January.
  13. Crawford, Vincent P, 1979. "On Compulsory-Arbitration Schemes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(1), pages 131-59, February.
  14. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-26, December.
  15. 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.
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Cited by:
  1. Jeremy Clark & Lana Friesen, 2009. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 119(534), pages 229-251, 01.
  2. Gary Charness & Peter J. Kuhn, 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," NBER Working Papers 15913, National Bureau of Economic Research, Inc.
  3. David L. Dickinson, 2007. "Cognitive Dissonance, Pessimism, and Behavioral Spillover Effects," Working Papers 2007-09, Department of Economics, University of Calgary, revised 26 Oct 2007.
  4. David Dickinson, 2009. "The Effects of Beliefs Versus Risk Attitude on Bargaining Outcomes," Theory and Decision, Springer, Springer, vol. 66(1), pages 69-101, January.
  5. Ivana Vitanova, 2011. "Debt renegotiation and entrepreneurial optimism," Post-Print halshs-00591059, HAL.
  6. David Dickinson & Lynn Hunnicutt, 2010. "Nonbinding recommendations: the relative effects of focal points versus uncertainty reduction on bargaining outcomes," Theory and Decision, Springer, Springer, vol. 69(4), pages 615-634, October.
  7. Deck, Cary A. & Farmer, Amy, 2009. "Strategic bidding and investments in final offer arbitration: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 361-373, May.
  8. Eric Guerci & Sylvie Thoron, 2011. "Experimental comparison of compulsory and non compulsory arbitration mechanisms," Working Papers halshs-00584328, HAL.

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