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

37 Pages Posted: 17 Jul 2020

See all articles by Paul Pecorino

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Michael Solomon

Culverhouse College of Business

Mark van Boening

University of Mississippi - Department of Economics

Date Written: June 25, 2020

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

Suggested Citation

Pecorino, Paul and Solomon, Michael and van Boening, Mark, Bargaining with Voluntary Transmission of Private Information: An Experimental Analysis of Final Offer Arbitration (June 25, 2020). Available at SSRN: https://ssrn.com/abstract=3635742 or http://dx.doi.org/10.2139/ssrn.3635742

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

Michael Solomon

Culverhouse College of Business ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Mark Van Boening

University of Mississippi - Department of Economics ( email )

371 Holman Hall
University, MS 38677
United States

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