Bargaining with Voluntary Transmission of Private Information: An Experimental Analysis of Final Offer Arbitration

Abstract

In Final Offer Arbitration, both parties submit a proposal to an arbitrator. In the event the parties cannot reach a negotiated settlement, the arbitrator chooses the submitted proposal that is closest to her preferred settlement. In such a model, asymmetric information can lead to costly bargaining failure. Voluntary disclosure of private information has the potential to eliminate disputes which would otherwise arise. However, the timing of this information transmission is crucial, because information can be used by the previously uninformed party to submit a superior proposal to the arbitrator. Thus, there is an incentive to conceal information if it is to be revealed prior to the submission of proposals to the arbitrator. However, information transmission should occur if it takes place after the submission of these proposals. In this paper, we test this theory experimentally and find individuals with a strong case reveal their private information in 40% of negotiations when revelation comes prior to the submission of proposals and in 60% of negotiations when revelation comes after the submission of these proposals. Moreover, information disclosure by a party with a strong case increases the rate of settlement as predicted by the theory.

Keywords: Final Offer Arbitration, Asymmetric Information, Voluntary Disclosure, Dispute Resolution

JEL Classification: K41, J52, D82, C78, C92