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Bargaining and hold-up: the role of arbitration

Author

Listed:
  • Yannick Gabuthy
  • Abhinay Muthoo

Abstract

This paper analyses arbitration as a surrogate for complete contracts. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make productive-enhancing, relationship-specific investments, and then negotiate over the division of the resultant surplus. It is shown that the mere presence of the arbitrator (in the background of negotiations) may enhance investment incentives ex ante by minimizing each party’s ability to engage in hold-up behaviours ex post. Furthermore, we highlight notably that the partners should optimally commit to call an arbitrator ensuring a compromise by awarding a reasonable share of the surplus to the worker. Indeed, this type of arbitrator would harmonize the parties’ bargaining powers and then weight their investment incentives optimally.

Suggested Citation

  • Yannick Gabuthy & Abhinay Muthoo, 2019. "Bargaining and hold-up: the role of arbitration," Oxford Economic Papers, Oxford University Press, vol. 71(1), pages 292-308.
    • Handle: RePEc:oup:oxecpp:v:71:y:2019:i:1:p:292-308.
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    File URL: http://hdl.handle.net/10.1093/oep/gpy035
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    Cited by:

    1. Shachat, Jason & Walker, Matthew J. & Wei, Lijia, 2024. "Contingent payments in procurement interactions: Experimental evidence," European Economic Review, Elsevier, vol. 170(C).
    2. Park, Se Mi, 2024. "Commercial arbitration regime and sourcing decision," International Review of Law and Economics, Elsevier, vol. 78(C).
    3. Zerbini, Fabrizio & Miceli, Gaetano “Nino” & De Carlo, Manuela, 2024. "Better to be the same or different? Paired customer and selling orientations and their impact on the exploitation of relationship-specific investments (RSIs) in dyads," European Management Journal, Elsevier, vol. 42(3), pages 385-396.

    More about this item

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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