Discovery in a Screening Model of Final Offer Arbitration

Abstract

We develop screening models of final offer arbitration (FOA) in which the uninformed party makes a demand to the informed party. We consider models in which settlement occurs before and after the submission of binding offers, and in each we analyze costly discovery. Our results are compared to conventional arbitration (CA) which may viewed as a litigation model. Overall, the incentive to invoke discovery is stronger in FOA than in CA, due in part, to informational rents often present in FOA, but not in CA. Moreover, submitted proposals under FOA contain information which raise the benefit of invoking discovery.

Keywords: Final Offer Arbitration, Asymmetric Information, Discovery

JEL Classification: K4, J52, D82