Final-Offer Arbitration with Uncertainty Averse Parties
24 Pages Posted: 3 Feb 2016 Last revised: 4 Feb 2016
Date Written: February 3, 2016
Abstract
Final-offer arbitration (FOA) is a widely used binding dispute resolution mechanism, where an impartial arbitrator is constrained to choose one of the two final offers pro- posed by two disputing parties. We build an equilibrium model of FOA with agents averse to arbitral uncertainty to study three important issues: the role of FOA in incentivizing negotiated settlements, convergence of final offers, and the effect of diversity of arbitrator opinion on welfare. Uncertainty increases the likelihood of non-arbitrated settlement and make the final offers converge to each other. Risk aversion is not necessary. Precision and mean of arbitral uncertainty matter differently and can be con- trolled separately. Moreover, as also argued by the industry practitioners, diversity (of opinion) in the arbitrator pool increases the welfare of negotiating parties.
Keywords: negotiation, conflict resolution, arbitration, final-offer arbitration, uncertainty aversion, multiple priors
JEL Classification: C72, C78, D60, D74
Suggested Citation: Suggested Citation