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Binding Versus Final-Offer Arbitration: A Combination is Best

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  • Brams, Steven J.
  • Merrill, Samuel III

Abstract

A new procedure is proposed for settling disputes which combines binding arbitration (BA) and final-offer arbitration (FOA). Unlike either of the two pure procedures, combined arbitration (CA) induces the two parties to converge in making their final offers. Under BA, the arbitrator's settlement is binding on the two sides; under FOA, the arbitrator chooses the final offer of the party closer to what he/she considers a fair settlement. Under CA, FOA is used if the arbitrator's notion of a fair settlement falls between the two final offers or if the final offers converge or crisscross; otherwise, BA is used. When modeled as a two-person, zero-sum game of imperfect information, in which the two parties make final offers to maximize their expected payoffs---based on their perception of the arbitrator's probability distribution of fair settlements---convergence is to the median and constitutes a global equilibrium if the probability distribution is continuous, unimodal, and symmetric about the median. When the distribution is not symmetric or the two parties have different distributions, alternative solutions are derived---including one based on the parties' being within a "critical distance" of each other---and illustrated by examples. Alternatives to the arbitrator's decision calculus are considered, and questions about applying the new arbitration procedure are discussed.
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Suggested Citation

  • Brams, Steven J. & Merrill, Samuel III, 1984. "Binding Versus Final-Offer Arbitration: A Combination is Best," Working Papers 84-07, C.V. Starr Center for Applied Economics, New York University.
  • Handle: RePEc:cvs:starer:84-07
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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. Barberà, Salvador & Coelho, Danilo, 2017. "Balancing the power to appoint officers," Games and Economic Behavior, Elsevier, vol. 101(C), pages 189-203.
    4. 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.
    5. David Dickinson, 2005. "Bargaining Outcomes with Double-Offer Arbitration," Experimental Economics, Springer;Economic Science Association, vol. 8(2), pages 145-166, June.
    6. Barberà, Salvador & Coelho, Danilo, 2010. "On the rule of k names," Games and Economic Behavior, Elsevier, vol. 70(1), pages 44-61, September.
    7. 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.
    8. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
    9. Armstrong, Michael J. & Hurley, W. J., 2002. "Arbitration using the closest offer principle of arbitrator behavior," Mathematical Social Sciences, Elsevier, vol. 43(1), pages 19-26, January.
    10. Deck, Cary A. & Farmer, Amy, 2009. "Strategic bidding and investments in final offer arbitration: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 361-373, May.
    11. Mazalov, Vladimir & Tokareva, Julia, 2012. "Arbitration procedures with multiple arbitrators," European Journal of Operational Research, Elsevier, vol. 217(1), pages 198-203.
    12. 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.
    13. Willson, Stephen J., 2000. "Axioms for the outcomes of negotiation in matrix games," Mathematical Social Sciences, Elsevier, vol. 39(3), pages 323-348, May.
    14. 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.
    15. 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.
    16. Zeng, Dao-Zhi & Nakamura, Shinya & Ibaraki, Toshihide, 1996. "Double-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 31(3), pages 147-170, June.
    17. Wojciech Olszewski, 2011. "A Welfare Analysis of Arbitration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 174-213, February.

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