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Bargaining and Hold-up: The Role of Arbitration

Author

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  • Yannick Gabuthy
  • Abhinay Muthoo

Abstract

This paper presents an “incomplete contracting” model of arbitration. A fundamental notion that underlies our analysis is that it is optimal (in terms of promoting productivity-enhancing, relationship-specific investments) to determine ex-ante – well before arbitration would actually be required (if at all) – whether or not parties would engage the services of an arbitrator in the eventuality that they fail to resolve any disputes by themselves. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make (non-contractible) investments, and then negotiate over the division of the resultant surplus, which, if previously agreed, occurs in the shadow of arbitration. We derive several results and insights concerning whether or not it is optimal for the parties to commit to call an arbitrator, in terms of arbitrator-preference and technological parameters.

Suggested Citation

  • Yannick Gabuthy & Abhinay Muthoo, 2018. "Bargaining and Hold-up: The Role of Arbitration," Working Papers of BETA 2018-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2018-04
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    Cited by:

    1. is not listed on IDEAS
    2. Shachat, Jason & Walker, Matthew J. & Wei, Lijia, 2024. "Contingent payments in procurement interactions: Experimental evidence," European Economic Review, Elsevier, vol. 170(C).
    3. Park, Se Mi, 2024. "Commercial arbitration regime and sourcing decision," International Review of Law and Economics, Elsevier, vol. 78(C).
    4. Zerbini, Fabrizio & Miceli, Gaetano “Nino” & De Carlo, Manuela, 2024. "Better to be the same or different? Paired customer and selling orientations and their impact on the exploitation of relationship-specific investments (RSIs) in dyads," European Management Journal, Elsevier, vol. 42(3), pages 385-396.

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    Keywords

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    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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