Reputational Concerns in Arbitration: Decision Bias and Information Acquisition

Abstract

We analyze how reputational concerns of arbitrators affect the quality of their decision process, in particular, information acquisition and bias. We assume that arbitrators differ in their ability to observe the state of the world and that information acquisition is costly and unobservable. We show that reputational concerns increase incentives for information acquisition but may induce arbitrators to bias their decisions towards one party in the dispute. This decision bias is greater when the dispute proceedings are confidential rather than public. Building on these results, we study the circumstances under which the parties to a contract choose to employ arbitration rather than litigation in court to resolve their disputes.