Arbitration in Anarchy

Abstract

The paper investigates the prospects for “neutral” arbitration in anarchy, in which the parties to a dispute have no recourse to legal forms of dispute resolution. A neutral arbitrator as we define it is someone who settles disputes according to some standard or norm external to the parties. In anarchy, the use of an external norm may reduce the likelihood that the parties will both agree to arbitration ex ante and comply with it ex post. This implies that, in anarchic settings, an arbitrator must take into account facts about the relative powers of the parties to prevail in a fight if she is to promote peaceful conflict resolution. Neutral norm enforcement is possible when the arbitrator has some coercive power permitting her to force the disputing parties to appear and to accept her proposed settlement. We show, however, that some degree of neutral norm enforcement is also possible under weaker conditions, without any power to coerce. Key conditions for approximately neutral arbitration are that the gains from arbitration are large and power asymmetries between the parties are not too extreme.

Keywords: Arbitration, Constitution

JEL Classification: D20