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An Analysis of Final-Offer Arbitration

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  • Henry S. Farber

    (Department of Economics Massachusetts Institute of Technology)

Abstract

A model of the final-offer arbitration (FOA) process is developed, and the Nash equilibrium pair of final offers is derived. It is shown that the more risk-averse party submits a more reasonable offer so that it has a higher probability of being chosen by the arbitrator. The contract zone of potential negotiated settlements is derived, and its size is shown to be directly related to the uncertainty of the parties concerning the arbitrators' preferences. However, the final offers of the parties diverge where there is increased uncertainty, so that there is a trade-off between the size of the contract zone and the extremity of arbitrated awards when negotiations do fail. Finally, it is shown that negotiated settlements under FOA are skewed against the more risk-averse party.

Suggested Citation

  • Henry S. Farber, 1980. "An Analysis of Final-Offer Arbitration," Journal of Conflict Resolution, Peace Science Society (International), vol. 24(4), pages 683-705, December.
    • Handle: RePEc:sae:jocore:v:24:y:1980:i:4:p:683-705
    DOI: 10.1177/002200278002400407
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    References listed on IDEAS

    as
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    4. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
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