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Strategic Bargaining Behavior, Self-Serving Biases, and the Role of Expert Agents: An Empirical Study of Final-Offer Arbitration

  • Orley Ashenfelter
  • Gordon B. Dahl

In this paper we study the complete evolution of a final-offer arbitration system used in New Jersey with data we have systematically collected over the 18-year life of the program. Covering the wages of police officers and firefighters, this system provides virtually a laboratory setting for the study of strategic interaction. Our empirical analysis provides convincing evidence that, left alone, the parties do not construct and present their offers as successfully as when they retain expert agents to assist them. In principle, expert agents may be helpful to the parties for two different reasons: (a) they may move the arbitrator to favor their position independently of the facts, or (b) they may help eliminate inefficiencies in the conduct of strategic behavior. In this paper we construct a model where the agent may influence outcomes independent of the facts, but where the agent may also improve the outcomes of the process by moderating any self-serving biases or over-confidence that may have led to impasse in the first instance. Our data indicate that expert agents may well have had an important role in moderating self-serving biases early in the history of the system, but that the parties have slowly evolved to a non-cooperative equilibrium where the use of third-party agents has become nearly universal and where agents are used primarily to move the fact finder's decisions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11189.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11189
Note: LS
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  1. Bloom, David E & Cavanagh, Christopher L, 1986. "An Analysis of the Selection of Arbitrators," American Economic Review, American Economic Association, vol. 76(3), pages 408-22, June.
  2. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implicationsfor Growth," University of Chicago - George G. Stigler Center for Study of Economy and State 65, Chicago - Center for Study of Economy and State.
  3. Orley Ashenfelter & David Bloom, 1981. "Models of Arbitrator Behavior: Theory and Evidence," Working Papers 526, Princeton University, Department of Economics, Industrial Relations Section..
  4. 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 1503-28, November.
  5. Orley Ashenfelter & Janet Currie & Henry S. Farber & Matthew Spiegel, 1990. "An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems," Working Papers 647, Princeton University, Department of Economics, Industrial Relations Section..
  6. Bazerman, Max H. & Neale, Margaret A. & Valley, Kathleen L. & Zajac, Edward J. & Kim, Yong Min, 1992. "The effect of agents and mediators on negotiation outcomes," Organizational Behavior and Human Decision Processes, Elsevier, vol. 53(1), pages 55-73, October.
  7. Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," NBER Working Papers 8650, National Bureau of Economic Research, Inc.
  8. Richard N. Block & Jack Stieber, 1987. "The impact of attorneys and arbitrators on arbitration awards," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 40(4), pages 543-555, July.
  9. Ashenfelter, Orley, 1987. "Arbitrator Behavior," American Economic Review, American Economic Association, vol. 77(2), pages 342-46, May.
  10. Farber, Henry S & Bazerman, Max H, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 99-120, February.
  11. Babcock, Linda & Wang, Xianghong & Lowenstein, George, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 1-19, February.
  12. Henry S. Farber & Max H. Bazerman, 1989. "Divergent Expectations as a Cause of Disagreement in Bargaining: Evidence from a Comparison of Arbitration Schemes."," NBER Working Papers 2139, National Bureau of Economic Research, Inc.
  13. 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 819-44, July.
  14. Craig A. Olson & Paul Jarley & Gregory Dell'Omo, 1992. "A comparison of interest arbitrator decision-making in experimental and field settings," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 45(4), pages 711-723, July.
  15. Bhagat, Sanjai & Brickley, James A. & Coles, Jeffrey L., 1994. "The costs of inefficient bargaining and financial distress *1: Evidence from corporate lawsuits," Journal of Financial Economics, Elsevier, vol. 35(2), pages 221-247, April.
  16. Babcock, Linda, et al, 1995. "Biased Judgments of Fairness in Bargaining," American Economic Review, American Economic Association, vol. 85(5), pages 1337-43, December.
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