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Signaling in the “Before” Model of Final Offer Arbitration

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  • Amy Farmer
  • Paul Pecorino

Abstract

We develop a signaling model of final offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator and if no agreement is reached, the arbitrator must select one of the two submitted proposals. We analyze a “before” model of FOA in which all settlement activity occurs prior to the exchange of proposals. We characterize the pure strategy separating, equilibrium associated with this game. Relative to a model of conventional arbitration (CA), the pure strategy separating equilibrium is associated with a higher dispute rate because weak player types have an enhanced incentive to bluff in this setting. This result continues to hold in semi-pooling equilibria. Thus our model is consistent with a higher dispute rate in FOA compared to CA. We also compare the incentive to engage in costly voluntary disclosure and costly discovery (JEL K4, C7, J52).

Suggested Citation

  • Amy Farmer & Paul Pecorino, 2023. "Signaling in the “Before” Model of Final Offer Arbitration," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 39(2), pages 521-556.
    • Handle: RePEc:oup:jleorg:v:39:y:2023:i:2:p:521-556.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewab036
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    More about this item

    JEL classification:

    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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