Arbitration and Investment Incentives

Posted: 30 Mar 2006

See all articles by Yannick Gabuthy

Yannick Gabuthy

National Center for Scientific Research (CNRS), Bureau of Economic Theory and Application (BETA), University Nancy 2

Abhinay Muthoo

University of Essex - Department of Economics

Date Written: 2005

Abstract

This paper presents a incomplete contracting model of arbitration. A fundamental notion that underlies our analysis is that it can be optimal (especially in terms of promoting productivity-enhancing, relationship-specific investments) to determine ex-ante - well before arbitration would actually be required (if at all) - whether or not parties in a long-term relationship would engage the services of an arbitrator in the eventuality that they fail to resolve any disputes by themselves. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make (non-contractable) productivity-enhancing, relationship-specific investments, and then negotiate over the division of the resultant surplus (revenue), which, if previously agreed, occurs in the shadow of arbitration. We derive several results and insights concerning whether or not it is optimal for the parties to commit (via a contract) to call an arbitrator (if and when required), in terms of arbitrator-preference and technological parameters.

Keywords: Arbitration, Non-Contractable Investments, Incomplete Contracts, Bargaining

JEL Classification: C78, D23, K40

Suggested Citation

Gabuthy, Yannick and Muthoo, Abhinay, Arbitration and Investment Incentives (2005). Available at SSRN: https://ssrn.com/abstract=891105

Yannick Gabuthy (Contact Author)

National Center for Scientific Research (CNRS), Bureau of Economic Theory and Application (BETA), University Nancy 2 ( email )

13 place Carnot C.O. n° 26
Nancy, F-54035
France
33 0 3 83 19 26 04 (Phone)

HOME PAGE: http://cournot2.u-strasbg.fr/users/beta/pagesperso/affinfos.php?id=222

Abhinay Muthoo

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 873 333 (Phone)
+44 1206 872 724 (Fax)

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