Bargaining with Informative Offers: An Analysis of Final-Offer Arbitration
Final-offer arbitration is analyzed when parties are permitted to renegotiate after bids are submitted to the arbiter. If the failure to settle without arbitration arises owing to informational asymmetries, then the final-offer bids may communicate some of this private information. The informational content of the bids may act to encourage settlement after the bids have been submitted, though this outcome is not guaranteed. We find that a pooling equilibrium, under which all cases settle prior to arbitration, is less likely when there exists an opportunity for renegotiation. However, for parameter values in which there is no pooling equilibrium, the renegotiation stage strictly reduces the use of arbitration. The results may prove important in comparing settlement rates between final-offer arbitration and conventional arbitration. Copyright 1998 by the University of Chicago.