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

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 to conceal private information about the expected outcome in arbitration from his bargaining partner. Revealing this information allows the previously uninformed party to submit a more advantageous 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. 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.