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The chilling effect of optimism: The case of final-offer arbitration

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  • Dickinson, David L.

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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  • Dickinson, David L., 2006. "The chilling effect of optimism: The case of final-offer arbitration," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(1), pages 17-30, February.
  • Handle: RePEc:eee:soceco:v:35:y:2006:i:1:p:17-30
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    References listed on IDEAS

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    1. Steven J. Brams & Samuel Merrill, III, 1986. "Binding Versus Final-Offer Arbitration: A Combination is Best," Management Science, INFORMS, vol. 32(10), pages 1346-1355, October.
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    Citations

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    Cited by:

    1. Eric Guerci & Sylvie Thoron, 2011. "Experimental comparison of compulsory and non compulsory arbitration mechanisms," Working Papers halshs-00584328, HAL.
    2. David Dickinson, 2009. "The Effects of Beliefs Versus Risk Attitude on Bargaining Outcomes," Theory and Decision, Springer, vol. 66(1), pages 69-101, January.
    3. Zahra Murad & Martin Sefton & Chris Starmer, 2016. "How do risk attitudes affect measured confidence?," Journal of Risk and Uncertainty, Springer, vol. 52(1), pages 21-46, February.
    4. Emily Tanimura & Sylvie Thoron, 2016. "How Best to Disagree in Order to Agree?," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-17, September.
    5. David L. Dickinson, 2014. "Alternative dispute resolution," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-71, September.
    6. Weinstock, Eyal & Sonsino, Doron, 2014. "Are risk-seekers more optimistic? Non-parametric approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 236-251.
    7. David Dickinson & Lynn Hunnicutt, 2010. "Nonbinding recommendations: the relative effects of focal points versus uncertainty reduction on bargaining outcomes," Theory and Decision, Springer, vol. 69(4), pages 615-634, October.
    8. repec:clg:wpaper:2007-09 is not listed on IDEAS
    9. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
    10. Ivana Vitanova, 2011. "Debt renegotiation and entrepreneurial optimism," Post-Print halshs-00591059, HAL.
    11. Jeremy Clark & Lana Friesen, 2009. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Economic Journal, Royal Economic Society, vol. 119(534), pages 229-251, January.
    12. 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.
    13. Dickinson, David L. & Oxoby, Robert J., 2011. "Cognitive dissonance, pessimism, and behavioral spillover effects," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 295-306, June.

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