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The gambling effect of final-offer arbitration in bargaining

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  • King King Li

    (Shenzhen University)

  • Kang Rong

    (Shanghai University of Finance and Economics)

Abstract

We study an alternating-offer bargaining model with arbitration. Our model has two key features. First, there is a deadline in bargaining. Second, whenever the bargaining deadline is reached, an arbitrator uses final-offer arbitration to determine the outcome. We find that if players are sufficiently patient, they will always reject opponents’ offers during bargaining, and thus, the game always moves to arbitration. Our result is in sharp contrast to the usual prediction in the literature that the threat of going to final-offer arbitration encourages players to reach negotiated agreements before arbitration. Our result is due to the so-called gambling effect of final-offer arbitration that we discover.

Suggested Citation

  • King King Li & Kang Rong, 2020. "The gambling effect of final-offer arbitration in bargaining," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(2), pages 475-496, March.
    • Handle: RePEc:spr:joecth:v:69:y:2020:i:2:d:10.1007_s00199-018-1169-x
    DOI: 10.1007/s00199-018-1169-x
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Manzini, Paola & Mariotti, Marco, 2001. "Perfect Equilibria in a Model of Bargaining with Arbitration," Games and Economic Behavior, Elsevier, vol. 37(1), pages 170-195, October.
    3. 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.
    4. Amy Farmer, 2007. "Bargaining over an Uncertain Value: Arbitration Mechanisms Compared," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 547-579, October.
    5. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, vol. 54(4), pages 819-844, July.
    6. Rong, Kang, 2012. "Alternating-offer games with final-offer arbitration," Games and Economic Behavior, Elsevier, vol. 76(2), pages 596-610.
    7. Yildiz, Muhamet, 2011. "Nash meets Rubinstein in final-offer arbitration," Economics Letters, Elsevier, vol. 110(3), pages 226-230, March.
    8. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, vol. 54(6), pages 1503-1528, November.
    9. Olivier Compte & Philippe Jehiel, 2004. "Gradualism in Bargaining and Contribution Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(4), pages 975-1000.
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    Cited by:

    1. Farmer, Amy & Pecorino, Paul, 2022. "Discovery in a screening model of final offer arbitration," International Review of Law and Economics, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    Bargaining; Alternating offer; Final-offer arbitration; Deadline;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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