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Journal of Law, Economics, and Organization Advance Access originally published online on September 13, 2006
Journal of Law, Economics, and Organization 2007 23(3):547-579; doi:10.1093/jleo/ewm012
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© The Author 2006. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Bargaining over an Uncertain Value: Arbitration Mechanisms Compared

Cary A. Deck*

University of Arkansas

Amy Farmer**

University of Arkansas

* University of Arkansas. Email: cdeck{at}walton.uark.edu.

** University of Arkansas. Email: afarmer{at}walton.uark.edu.

This article explores the theoretical and behavioral impact of conventional arbitration and final-offer arbitration (FOA) when parties are bargaining over an uncertain value. In this context, one player receives a fixed payment while the other player receives the uncertain residual. Although both forms of arbitration have identically sized contract zones, we show theoretically that in FOA the contract zone shifts in favor of the residual claimant. In addition, as the variance of the possible values rises, the contract zone shifts further in favor of the residual claimant. In laboratory testing, the contract zone roughly reflects the central tendencies of behavior; however, both forms of arbitration increase conflict relative to a no-arbitration baseline. This is caused by residual claimants being more aggressive when arbitration is available while fixed-payment recipients are not. However, both parties play a role in the conflict escalation due to the increased proposal variation.

This research was supported by the Decision Risk and Management Science Program of the National Science Foundation (SES-0350709). The authors wish to thank David Dickinson, Paul Pecorino, and Mark Van Boening for helpful comments and thank Nathan Espinosa and Chenin Vadalma for their research assistance.


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Home page
 Am Law Econ RevHome page
C. Deck, A. Farmer, and D.-Z. Zeng
Amended Final-offer Arbitration Outperforms Final-offer Arbitration
Am. Law Econ. Rev., October 19, 2007; (2007) ahm012v1.
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