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

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Author Info
David Dickinson

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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 Format: application/pdf
File Function: First version, 2003
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Publisher 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
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Handle: RePEc:usu:wpaper:2003-01

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  1. David Dickinson, 2009. "The Effects of Beliefs Versus Risk Attitude on Bargaining Outcomes," Theory and Decision, Springer, vol. 66(1), pages 69-101, January. [Downloadable!] (restricted)
  2. David L. Dickinson & Robert Oxoby, 2007. "Cognitive Dissonance, Pessimism, and Behavioral Spillover Effects," Working Papers 2007-09, Department of Economics, University of Calgary, revised 26 Oct 2007. [Downloadable!]
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  3. Jeremy Clark & Lana Friesen, 2006. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Working Papers in Economics 06/09, University of Canterbury, Department of Economics. [Downloadable!]
    Other versions:
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This page was last updated on 2009-12-5.

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