Abstract
Final-offer arbitration (FOA) was proposed to settle a dispute between two disputants. Although FOA was proposed to induce two disputants to reach an agreements by themselves, FOA fails to achieve the fulfillment, when disputants have incomplete information about the arbitrator’s notion of a fair settlement. This paper proposes a new arbitration procedure, which is a simple amendment to FOA that lets the arbitration settlement be determined by the loser’s offer if the offers diverge. We show that the offers converge in a unique pure strategy Nash equilibrium without any additional condition. We also provide two methods to prevent an extreme arbitration result, in case the offers do not converge for some reasons.
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