Final-offer arbitration with a bonus

Steven J. Brams, Samuel Merrill

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Final-offer arbitration (FOA) is an arbitration procedure, used in about a dozen states and some professional sports, under which the arbitrator is restricted to choosing one or the other of two 'final offers' proposed by two parties to a dispute. Modeled as a two-person, zero-sum game of imperfect information, in which the parties are assumed to know the probability distribution of the arbitrator's fair settlements and to make final offers to maximize their expected payoffs, FOA does not induce the two parties to converge but rather to make final offers usually two or more standard deviations apart. However, if either or both parties attach added value to winning per se (i.e., by having their offer chosen) - independent of the value of the settlement - then the Nash equilibrium final offers will tend to be drawn together and, in some cases, converge. Arbitration data from New Jersey appear to be consistent with the predictions of this model.

    Original languageEnglish (US)
    Pages (from-to)79-92
    Number of pages14
    JournalEuropean Journal of Political Economy
    Volume7
    Issue number1
    DOIs
    StatePublished - Apr 1991

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Political Science and International Relations

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