Arbitration with Uninformed Consumers

76 Pages Posted: 15 Oct 2018 Last revised: 13 Jun 2019

See all articles by Mark Egan

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Gregor Matvos

University of Texas at Austin - Department of Finance

Amit Seru

Stanford University

Date Written: June 2019


This paper argues that firms have an informational advantage over consumers in selecting arbitrators in consumer arbitration. We document how the selection process impacts arbitration outcomes by studying roughly 9,000 consumer arbitration cases in the securities industry. Securities disputes present a good laboratory: arbitration is mandatory for all disputes, eliminating selection concerns; the parties choose arbitrators from a randomly generated list, and arbitrators are compensated only if chosen; and the selection mechanism is similar to other major arbitration forums. We document three facts. First, some arbitrators are systematically more industry friendly than others. Second, firms appear to exploit this information: despite a randomly generated list of potential arbitrators, industry-friendly arbitrators are forty percent more likely to be selected. Third, more experienced firms and less sophisticated consumers select more industry friendly arbitrators. We develop and calibrate a model of arbitrator selection with uninformed consumers. We find that competition between arbitrators exacerbates the informational advantage of firms resulting in all arbitrators slanting towards being industry friendly and resulting in roughly $16,000 lower awards. Counterfactuals suggest that several proposals aimed at improving customer outcomes in arbitration, such as increasing arbitrator incentives and increasing the number of strikes, lead to quantitatively more industry friendly arbitration due to firms' informational advantage.

Keywords: Arbitration, Financial Advisers, Brokers, Consumer Finance, Financial Misconduct and Fraud

JEL Classification: G24, G28, D14, D18

Suggested Citation

Egan, Mark and Matvos, Gregor and Seru, Amit, Arbitration with Uninformed Consumers (June 2019). Harvard Business School Finance Working Paper No. 19-046. Available at SSRN: or

Mark Egan

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Baker Library 365
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gregor Matvos

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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