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Journal of Law, Economics, and Organization Advance Access published online on September 13, 2006
Journal of Law, Economics, and Organization, 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

Article

Bargaining over an Uncertain Value: Arbitration Mechanisms Compared

Cary A. Deck 1 * and Amy Farmer 1

1 University of Arkansas

* To whom correspondence should be addressed.
Cary A. Deck, E-mail: cdeck{at}walton.uark.edu


  Abstract

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.


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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.
[Abstract] [Full Text] [PDF]


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