Final-offer Arbitration Research Articles

An Experimental Comparison of Conventional and Final Offer Arbitration

An Experimental Comparison of Conventional and Final Offer Arbitration

Proposal convergence and settlement under final offer arbitration

Under final offer arbitration (FOA), each party to the dispute submits a proposal to the arbitrator who must choose one of the two submitted proposals in the event an agreement is not reached. A long line of research on FOA has assumed that the submitted proposals to the arbitrator are the final bargaining positions of the parties to the dispute. One consequence of this assumption has been a focus on whether proposals submitted to the arbitrator converge towards one another. However, current practice implies a separation between settlement negotiations and proposals submitted to the arbitrator. We use a simple setting to show that proposal convergence can be consistent with an increase in disputes, a decrease in disputes or no effect on the dispute rate. In order to be fully evaluated, mechanisms which lead to proposal convergence must be embedded in a model in which disputes arise endogenously. Understanding FOA is important because it is a widely used procedure. These uses include labor disputes as well as pricing disputes in the telecommunications industries of the United States and Canada.

Firm Behavior Under Conditions of Final Offer Arbitration: An Empirical Analysis of Major League Baseball’s Salary Negotiation Structure

Abstract: This paper explores the use of final offer interest arbitration (FOA) in Major League Baseball (MLB) and whether arbitrated salaries differ meaningfully from private settlements. MLB provides an excellent environment to analyze FOA because it is common practice for eligible players and their teams to announce official intended arbitration figures well in advance of hearings but ultimately privately negotiate a contract in the interim. This allows for consideration of the bounded arbitrated salary environment even when a hearing is avoided. Results reaffirm the findings of Burgess and Marburger (1993), which suggested that arbitrated salaries are of “low quality” in that the distribution range is wider for arbitration compared to private negotiation. Second, this paper contributes to existing literature by expanding analysis to including quantile regression, which indicates that not only is contract length positively correlated with players’ salaries but also statistically significant differences in this effect exist throughout the distribution.

N-Player Final-Offer Arbitration: Harmonic Numbers in Equilibrium

We consider how a mechanism of final-offer arbitration may be applied to a negotiation between N players attempting to split a unit of wealth. The game model is defined where the arbitrator chooses a fair split from a Dirichlet distribution. For the case of a uniform probability distribution the equilibrium strategy is found as a function of the Harmonic numbers.

Baseball Arbitration as a Suitable Alternative for Construction and Real Estate Disputes

Baseball Arbitration (or Final Offer Arbitration (FOA)) is a dispute resolution mechanism to resolve controversies where each party submits a final offer. The arbitral tribunal must then decide by picking only one of these proposals. Given the arbitrators’ powers’ limitations, these proceedings are usually shorter and less expensive than traditional dispute resolution mechanisms. In addition, contrary to conventional arbitration, parties tend not to assume unrealistic or extreme positions, which could promote amicable settlement since it is an all-or-nothing proceeding. FOA could effectively resolve monetary disputes in industries where parties seek to preserve the commercial relationship while avoiding unnecessary delays. Therefore, Baseball Arbitration could be advantageous in the construction and real estate sectors. However, most arbitral institutions do not have specific rules for conducting Baseball Arbitration proceedings. This article proposes a model clause for parties wishing to submit their disputes to FOA. In our proposal, the arbitrator will receive the parties’ final offers and then issue its reasoned award, asserting the rationale to choose one offer over the other. Arbitration, Baseball Arbitration, Final Offer Arbitration, ADR Mechanisms, Construction Disputes, Construction Arbitration, Real State Disputes, Real Estate Arbitration, Model Clauses

Proposal Convergence and Settlement under Final Offer Arbitration

Proposal Convergence and Settlement under Final Offer Arbitration

The impact of sleep restriction on interpersonal conflict resolution and the narcotic effect

Insufficient sleep is commonplace, and understanding how this affects interpersonal conflict holds implications for personal and workplace settings. We experimentally manipulated participant sleep state for a full week prior to administering a stylized bargaining task that models payoff uncertainty at impasse with a final-offer arbitration (FOA) procedure. FOA use in previous trials decreases the likelihood of voluntary settlements going forward—the narcotic effect. We also report a novel result that a significantly stronger narcotic effect is estimated for more sleepy bargaining pairs. One implication is that insufficient sleep predicts increased dependency on alternatives to voluntarily resolution of interpersonal conflict.

Discovery in a screening model of final offer arbitration

We develop screening models of final offer arbitration (FOA) in which the uninformed party makes a demand to the informed party. We consider models in which settlement occurs before and after the submission of binding offers, and in each we analyze costly discovery. Our results are compared to conventional arbitration (CA) which may be viewed as a litigation model. Overall, the incentive to invoke discovery is stronger in FOA than in CA, due in part, to informational rents often present in FOA, but not in CA. Moreover, submitted proposals under FOA contain information which raise the benefit of invoking discovery. FOA is a widely used procedure, including in the telecommunications industry.

Mandatory Binding Arbitration: Avoiding Stalemates Over the Tax Chessboard

The resolution of tax treaty disputes under the Mutual Agreement Procedure (MAP) mechanism is inherently problematic. This article examines how the introduction of final-offer arbitration (FOA) can improve dispute resolution using a game-theoretical approach. It will be argued that arbitration introduces an element of finality that was demonstrably absent in the MAP while also contributing to the speedier resolution of disputes which is beneficial to all international stakeholders. After demonstrating the advantages of arbitration, the paper considers how its institutional design can be optimized in the tax context. It makes proposals regarding the publication of arbitral decisions to address concerns of countries that are still skeptical about whether or not to endorse it. Tax dispute resolution, game theory, mandatory binding arbitration, double tax treaties, mutual agreement procedure, baseball arbitration, international taxation.

Signaling in the “Before” Model of Final Offer Arbitration

Abstract We develop a signaling model of final offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator and if no agreement is reached, the arbitrator must select one of the two submitted proposals. We analyze a “before” model of FOA in which all settlement activity occurs prior to the exchange of proposals. We characterize the pure strategy separating, equilibrium associated with this game. Relative to a model of conventional arbitration (CA), the pure strategy separating equilibrium is associated with a higher dispute rate because weak player types have an enhanced incentive to bluff in this setting. This result continues to hold in semi-pooling equilibria. Thus our model is consistent with a higher dispute rate in FOA compared to CA. We also compare the incentive to engage in costly voluntary disclosure and costly discovery (JEL K4, C7, J52).

Bargaining with voluntary transmission of private information: An experimental analysis of final offer arbitration

In Final Offer Arbitration, both parties submit a proposal to an arbitrator. In the event the parties cannot reach a negotiated settlement, the arbitrator chooses the submitted proposal that is closest to her preferred settlement. In such a model, asymmetric information can lead to costly bargaining failure. Voluntary disclosure of private information has the potential to eliminate disputes which would otherwise arise. However, the timing of this information transmission is crucial, because information can be used by the previously uninformed party to submit a superior proposal to the arbitrator. Thus, there is an incentive to conceal information if it is to be revealed prior to the submission of proposals to the arbitrator. However, information transmission should occur if it takes place after the submission of these proposals. In this paper, we test this theory experimentally and find individuals with a strong case reveal their private information in 40% of negotiations when revelation comes prior to the submission of proposals and in 60% of negotiations when revelation comes after the submission of these proposals. Moreover, information disclosure by a party with favorable information increases the rate of settlement as predicted by the theory.

Discovery and Disclosure in a Signaling Model of Final-Offer Arbitration

We develop a signaling model of final-offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator, and if no agreement is reached the arbitrator must select one of the two submitted proposals. In the context of this model, we analyze costly voluntary disclosure and costly discovery. In standard litigation models, costly disclosure may occur in the signaling game, but costly discovery never takes place. By contrast, under FOA if information transmission takes place prior to the submission of proposals to the arbitrator, costly discovery may take place. However, the incentive to engage in a voluntary disclosure is weakened relative to a standard litigation model. If information transmission takes place after the submission of proposals to the arbitrator, then the results are analogous to those found in a standard litigation model.

Signaling in the ‘Before’ Model of Final Offer Arbitration

We develop a signaling model of final offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator and if no agreement is reached, the arbitrator must select one of the two submitted proposals. We analyze a “before” model of FOA in which all settlement activity occurs prior to the exchange of proposals. We characterize the pure strategy separating, equilibrium associated with this game. Relative to a model of conventional arbitration (CA), the pure strategy separating equilibrium is associated with a higher dispute rate because weak player types have an enhanced incentive to bluff in this setting. This result continues to hold in semi-pooling equilibria. Thus our model is consistent with a higher dispute rate in FOA compared to CA. Results on the incentive to engage in costly voluntary disclosure are mixed across the two models. In contrast with CA, costly discovery can occur in this model of FOA. The analysis of out of equilibrium beliefs and actions is considerably more complex than in the standard litigation model.

The Impact of Sleep Restriction on Interpersonal Conflict Resolution and the Narcotic Effect

Insufficient sleep is commonplace, and understanding how this affects interpersonal conflict holds implications for personal and workplace settings. We experimentally manipulated participant sleep state for a full week prior to administering a stylized bargaining task that models payoff uncertainty at impasse with a final-offer arbitration (FOA) procedure. FOA use in previous trials decreases the likelihood of voluntary settlements going forward—the narcotic effect. We also report a novel result that a significantly stronger narcotic effect is estimated for more sleepy bargaining pairs. One implication is that insufficient sleep predicts increased dependency on alternatives to voluntarily resolution of interpersonal conflict.

Arbitration Over Out-Of-Network Medical Bills: Evidence From New Jersey Payment Disputes.

In 2018 New Jersey implemented a final-offer arbitration system to resolve payment disputes between insurers and out-of-network providers over surprise medical bills. Similar proposals are being considered by Congress and other states. In this article we examine how arbitration decisions compare with other relevant provider payment amounts by linking administrative data from New Jersey arbitration cases to Medicare and commercial insurance claims data. We find that decisions track closely with one of the metrics that arbitrators are shown-the eightieth percentile of provider charges-with the median decision being 5.7 times prevailing in-network rates for the same services. It is not a foregone conclusion that arbitrators will select winning offers based on proximity to this target, although our findings suggest that it is a strong anchor. The amount that providers can expect to receive through the arbitration process also affects their bargaining leverage with insurers, which could affect in-network negotiated rates more broadly. Therefore, basing arbitration decisions or a payment standard on unilaterally set provider-billed charges appears likely to increase health care costs relative to other surprise billing solutions and perversely incentivizes providers to inflate their charges over time.

Bargaining with Voluntary Transmission of Private Information: An Experimental Analysis of Final Offer Arbitration

In Final Offer Arbitration, both parties submit a proposal to an arbitrator. In the event the parties cannot reach a negotiated settlement, the arbitrator chooses the submitted proposal that is closest to her preferred settlement. In such a model, asymmetric information can lead to costly bargaining failure. Voluntary disclosure of private information has the potential to eliminate disputes which would otherwise arise. However, the timing of this information transmission is crucial, because information can be used by the previously uninformed party to submit a superior proposal to the arbitrator. Thus, there is an incentive to conceal information if it is to be revealed prior to the submission of proposals to the arbitrator. However, information transmission should occur if it takes place after the submission of these proposals. In this paper, we test this theory experimentally and find individuals with a strong case reveal their private information in 40% of negotiations when revelation comes prior to the submission of proposals and in 60% of negotiations when revelation comes after the submission of these proposals. Moreover, information disclosure by a party with a strong case increases the rate of settlement as predicted by the theory.

Discovery in a Screening Model of Final Offer Arbitration

We develop screening models of final offer arbitration (FOA) in which the uninformed party makes a demand to the informed party. We consider models in which settlement occurs before and after the submission of binding offers, and in each we analyze costly discovery. Our results are compared to conventional arbitration (CA) which may viewed as a litigation model. Overall, the incentive to invoke discovery is stronger in FOA than in CA, due in part, to informational rents often present in FOA, but not in CA. Moreover, submitted proposals under FOA contain information which raise the benefit of invoking discovery.

Dual-Issue Final-Offer Arbitration: Invariance of Pure Optimal Strategies Under Lp Metrics

We consider a final-offer arbitration problem between two players with two quantitative issues in dispute. We model the problem as a zero-sum game where the arbiter’s opinion is drawn from a bivariate normal distribution and derive the only possible pure strategies regardless of the choice of [Formula: see text] metric used by the arbiter.

Alpha-Final Offer Arbitration: The Best Way to Avoid Negotiation Failure

Under the arbitration mechanisms most used in the field, Final-Offer Arbitration (FOA) and Conventional Arbitration (CA), the negotiators still do not reach high agreement rates by themselves. This paper presents an experiment to evaluate a new arbitration mechanism: α-Final Offer Arbitration (α-FOA). This mechanism is similar to a second-price auction, which punishes the loser with a value (α) proportional to the difference between her final offer and the arbitrator’s fair settlement. The experiment also divides the pool of subjects within a session into two groups according to their estimated risk preferences in order to assess how the contract zone depends on the relative risk preferences of the subjects involved in negotiation. Although agreement rates overall are low, the results show that α-FOA has a significantly higher agreement rate than both CA and FOA. Contrary to theoretical prediction, the more-risk-averse group of subjects does not have a higher agreement rate than the less-risk-averse group.

Discovery and Disclosure in a Signaling Model of Final Offer Arbitration

We develop a signaling model of final offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator and if no agreement is reached, the arbitrator must select one of the two submitted proposals. Within the context of this model we analyze costly voluntary disclosure and costly discovery. In standard litigation models, costly disclosures may occur in the signaling game, but costly discovery never takes place. By contrast, under FOA if information transmission takes place prior to the submission of proposals to the arbitrator, costly discovery may take place. However, the incentive to engage in a voluntary disclosure is weakened relative to a standard litigation model. If information transmission takes place after the submission of proposals to the arbitrator, then the results are analogous to those found in a standard litigation model. Understanding FOA is important, because it is widely used, including in telecommunications rate disputes.