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Equilibrium Strategies for Final-Offer Arbitration: There is no Median Convergence

Author

Listed:
  • Steven J. Brams

    (New York University)

  • Samuel Merrill, III

    (Wilkes College)

Abstract

Final-offer arbitration is a procedure for settling disputes between two parties in which an arbitrator chooses the final offer of the party closest to what he considers a fair settlement. This procedure is modeled as a two-person, zero-sum game of imperfect information, in which the parties are assumed to know the probability distribution of the arbitrator's fair settlements and to make bids in an infinite strategy space that maximize their expected payoffs. Necessary and sufficient conditions for there to be local and global equilibria in pure strategies are derived, and necessary conditions for mixed strategies in a particular case are found. Such equilibria, when they exist in pure strategies, represent bids which are symmetric about the median and, for most common distributions, are separated from one another by two or more standard deviations. This finding suggests that final-offer arbitration may not accomplish its avowed purpose of inducing the two parties to converge on what they perceive to be the arbitrator's median fair settlement.

Suggested Citation

  • Steven J. Brams & Samuel Merrill, III, 1983. "Equilibrium Strategies for Final-Offer Arbitration: There is no Median Convergence," Management Science, INFORMS, vol. 29(8), pages 927-941, August.
  • Handle: RePEc:inm:ormnsc:v:29:y:1983:i:8:p:927-941
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    File URL: http://dx.doi.org/10.1287/mnsc.29.8.927
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    Cited by:

    1. Zeng, Dao-Zhi, 2006. "How powerful is arbitration procedure AFOA?," International Review of Law and Economics, Elsevier, vol. 26(2), pages 227-240, June.
    2. Zeng, Dao-Zhi, 2003. "An amendment to final-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 46(1), pages 9-19, August.
    3. Sansing, Richard, 1997. "Voluntary Binding Arbitration as an Alternative to Tax Court Litigation," National Tax Journal, National Tax Association, vol. 50(2), pages 279-296, June.
    4. David Dickinson, 2005. "Bargaining Outcomes with Double-Offer Arbitration," Experimental Economics, Springer;Economic Science Association, vol. 8(2), pages 145-166, June.
    5. Broughman, Brian, 2008. "Independent Directors and Board Control in Venture Finance," Berkeley Olin Program in Law & Economics, Working Paper Series qt9w966114, Berkeley Olin Program in Law & Economics.
    6. James Adams & Samuel Merrill, 2013. "Policy-seeking candidates who value the valence attributes of the winner," Public Choice, Springer, vol. 155(1), pages 139-161, April.
    7. Barberà, Salvador & Coelho, Danilo, 2010. "On the rule of k names," Games and Economic Behavior, Elsevier, vol. 70(1), pages 44-61, September.
    8. Steven J. Brams & Todd R. Kaplan & D. Marc Kilgour, 2015. "A Simple Bargaining Mechanism that Elicits Truthful Reservation Prices," Group Decision and Negotiation, Springer, vol. 24(3), pages 401-413, May.
    9. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
    10. Anbarci, Nejat & Feltovich, Nick, 2012. "Bargaining with random implementation: An experimental study," Games and Economic Behavior, Elsevier, vol. 76(2), pages 495-514.
    11. 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.
    12. Samuel Merrill & James Adams, 2007. "The effects of alternative power-sharing arrangements: Do “moderating” institutions moderate party strategies and government policy outputs?," Public Choice, Springer, vol. 131(3), pages 413-434, June.
    13. Orley Ashenfelter & Janet Currie & Matthew Spiegel, 1989. "An Experimental Comparison of Alternative Arbitration Systems," UCLA Economics Working Papers 563, UCLA Department of Economics.
    14. Mazalov, Vladimir & Tokareva, Julia, 2012. "Arbitration procedures with multiple arbitrators," European Journal of Operational Research, Elsevier, vol. 217(1), pages 198-203.
    15. repec:spr:grdene:v:13:y:2004:i:3:d:10.1023_b:grup.0000031090.95226.db is not listed on IDEAS
    16. 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.
    17. Hurley, W. J., 2003. "Effects of multiple arbitrators on final-offer arbitration settlements," European Journal of Operational Research, Elsevier, vol. 145(3), pages 660-664, March.
    18. Cary Deck & Amy Farmer & Dao-Zhi Zeng, 2007. "Amended final-offer arbitration over an uncertain value: A comparison with CA and FOA," Experimental Economics, Springer;Economic Science Association, vol. 10(4), pages 439-454, December.
    19. Zeng, Dao-Zhi & Nakamura, Shinya & Ibaraki, Toshihide, 1996. "Double-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 31(3), pages 147-170, June.
    20. Wojciech Olszewski, 2011. "A Welfare Analysis of Arbitration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 174-213, February.
    21. Sansing, Richard, 1997. "Voluntary Binding Arbitration as an Alternative to Tax Court Litigation," National Tax Journal, National Tax Association, vol. 50(2), pages 279-96, June.

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    Keywords

    games; group decisions;

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