Questions about the Efficiency of Employment Arbitration Agreements

Abstract:     
The growing popularity of arbitration agreements is well-documented. The academic literature on these agreements has been largely critical, arguing that they jeopardize important rights and enable employers to take unfair advantage of employees and consumers. However, standard economic analysis suggests that since these agreements are freely negotiated, they presumably increase the utility of both parties and are therefore efficient. This Article raises questions about the efficiency of such agreements in the employment context. It begins by modeling the decision-making process by which a rational employee would judge the desirability of an agreement, both after and before a dispute has arisen. The model demonstrates that no employee can, in reality, have the information necessary to make a rational economic judgment about a pre-dispute arbitration agreement. In the absence of information, systematic behavioral heuristics will lead employees to overlook or misjudge the costs and benefits of such agreements. Given that employees are not signing these agreements on the basis of rational economic analysis, the Article considers possible arguments that the agreements might still increase societal efficiency. Ultimately, it concludes that proponents of pre-dispute agreements need to provide stronger evidence of such efficiencies. In the meantime, courts, legislators, and commentators should focus more on the decisionmaking imperfections that can lead to inefficient arbitration agreements.

Number of Pages in PDF File: 78

Keywords: Arbitration agreements, employment contract, employees

JEL Classification: K31

working papers series