Dispute Resolution in the Signaling Model: A Comparison of Arbitration Mechanisms

36 Pages Posted: 12 Mar 2022

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: March 8, 2022

Abstract

We conduct an experimental analysis of signaling games using three models of arbitration. In the signaling model, the informed party in the dispute makes a settlement demand to the uninformed party. In conventional arbitration (CA), the arbitrator is free to impose her preferred settlement. In Final Offer Arbitration (FOA), each party submits a proposal to the arbitrator who must choose one of the two proposals. In one version of FOA, settlement bargaining (which occurs separately from proposal submission) occurs prior to the submission of proposals and in one version it occurs after. We compare both settlement rates and player payoffs across these three arbitration mechanisms. We find that the dispute rate is lowest in CA and highest in FOA when settlement negotiations take place prior to the submission of proposals. The difference across these two mechanisms is 10 percentage points which is about 25% of the average dispute rate.

Keywords: Arbitration, Asymmetric Information, Signaling, Experimental Bargaining

JEL Classification: J52, D82, C91

Suggested Citation

Pecorino, Paul and Solomon, Michael and van Boening, Mark, Dispute Resolution in the Signaling Model: A Comparison of Arbitration Mechanisms (March 8, 2022). Available at SSRN: https://ssrn.com/abstract=4052976 or http://dx.doi.org/10.2139/ssrn.4052976

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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