The Causes of Bargaining Failure: Evidence from Major League Baseball

University of Alabama Department of Economics, Finance and Legal Studies Working Paper No. 00-08-04

37 Pages Posted: 22 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

Victor Stango

UC Davis Graduate School of Management

Date Written: August 2000

Abstract

Much of the law and economics literature, including Bebchuk (1984) and Reinganum and Wilde (1986), explains settlement failure in bargaining as a consequence of asymmetric information. An alternative, non-strategic explanation found in Shavell (1982) suggests that settlement failure stems from excessive optimism. Final offer arbitration (FOA) in major league baseball provides an ideal setting for analyzing these theories since final offers, salaries and player statistics, which provide the fundamental facts for the case, are all readily available. If the informational theory is correct, final offer bidding behavior that appears aggressive should be associated with a superior outcome for the party making the offer. If the optimism theory is correct, an aggressive offer reflects undue optimism and should lead to an inferior final outcome for the party making the offer. Using data from 1990-93, we find strong evidence that arbitration stems from excessive optimism by players, and weaker evidence that clubs also exhibit excessive optimism. Excessive optimism appears to be more prevalent for those who lack previous experience with the arbitration process than for those who have previously been eligible.

JEL Classification: K4, J52, D82, C7

Suggested Citation

Farmer, Amy and Pecorino, Paul and Stango, Victor, The Causes of Bargaining Failure: Evidence from Major League Baseball (August 2000). University of Alabama Department of Economics, Finance and Legal Studies Working Paper No. 00-08-04. Available at SSRN: https://ssrn.com/abstract=240390 or http://dx.doi.org/10.2139/ssrn.240390

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)

Victor Stango

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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