Proposal Convergence and Settlement under Final Offer Arbitration

27 Pages Posted: 19 Apr 2022

See all articles by Amy Farmer

Amy Farmer

University of Arkansas - Department of Economics

Paul Pecorino

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

Date Written: April 14, 2022

Abstract

Under final offer arbitration (FOA), each party to the dispute submits a proposal to the arbitrator who must choose one of the two submitted proposals in the event of a dispute. A long line of research on FOA has assumed that the submitted proposals to the arbitrator are the final bargaining positions of the parties to the dispute. One consequence of this assumption has been a focus on whether proposals submitted to the arbitrator converge to one another. However, current practice implies a separation between settlement negotiations and proposals submitted to the arbitrator. We use a simple setting to show that proposal convergence can be consistent with an increase in disputes, a decrease in disputes or no effect on the dispute rate. In order to be fully evaluated, mechanisms which lead to proposal convergence must be embedded in a model in which disputes arise endogenously.

Keywords: Final Offer Arbitration, Proposal Convergence, Settlement

JEL Classification: J52, D82, K41

Suggested Citation

Farmer, Amy and Pecorino, Paul, Proposal Convergence and Settlement under Final Offer Arbitration (April 14, 2022). Available at SSRN: https://ssrn.com/abstract=4084095 or http://dx.doi.org/10.2139/ssrn.4084095

Amy Farmer

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
501-575-6093 (Phone)
501-575-3241 (Fax)

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)

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