Bargaining with Voluntary Transmission of Private Information: Does the Use of Final Offer Arbitration Impede Settlement?

University of Alabama Department of Economics, Finance and Legal Studies Working Paper No. 00-07-02

30 Pages Posted: 5 Sep 2000

See all articles by Amy Farmer

Amy Farmer

University of Arkansas - Department of Economics

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

Abstract

We identify two features of final offer arbitration (FOA) which may impede settlement in a bargaining game where asymmetric information drives the failure to settle. First, under FOA the informed party has an incentive not to voluntarily reveal private information. Revealing this information allows the previously uninformed party to submit a superior offer to the arbitrator to the detriment of the informed party. Second, in a two-type model, the uninformed player may choose to arbitrate all cases, a result which never occurs in a simple litigation game. Such a strategy allows this player to commit to an offer in arbitration that is optimal against the entire distribution of types with whom he must bargain. Each player's offer directly affects the outcome of arbitration under FOA, and it is this feature that generates impediments to settlement that are not observed in a simple litigation game. Both impediments to settlement are removed if bargaining is allowed to take place after potentially binding offers have been submitted to the arbitrator.

Keywords: Final Offer Arbitration, Voluntary Transmission of Private Information, Settlement

JEL Classification: K4, J52, D82

Suggested Citation

Farmer, Amy and Pecorino, Paul, Bargaining with Voluntary Transmission of Private Information: Does the Use of Final Offer Arbitration Impede Settlement? (July 2000). University of Alabama Department of Economics, Finance and Legal Studies Working Paper No. 00-07-02, Available at SSRN: https://ssrn.com/abstract=235521 or http://dx.doi.org/10.2139/ssrn.235521

Amy Farmer

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
501-575-6093 (Phone)
501-575-3241 (Fax)

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

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