Does Resorting to Online Dispute Resolution Promote Agreements? Experimental Evidence

This paper presents the results of an experiment performed to test the properties of an innovative bargaining mechanism (called automated negotiation) used to resolve disputes arising from Internet-based transactions. Automated negotiation is an online sealed-bid process in which an automated algorithm evaluates bids from the parties and settles the case if the offers are within a prescribed range. The observed individual behavior, based on 40 rounds of bargaining, is shown to be drastically affected by the design of automated negotiation. The settlement rule encourages disputants to behave strategically by adopting aggressive bargaining positions, which implies that the mechanism is not able to promote agreements and generate efficiency. This conclusion is consistent with the experimental results on arbitration and the well-known chilling effect: Automated negotiation tends to "chill" bargaining as it creates incentives for individuals to misrepresent their true valuations and discourage them to converge on their own. However, this perverse effect induced by the settlement rule depends strongly on the conflict situation. When the threat that a disagreement occurs is more credible, the strategic effect is reduced since defendants are more interested in maximizing the efficiency of a settlement than their own expected profit.