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Final-Offer Arbitration and Risk Aversion in Bargaining

Author

Listed:
  • Eran Hanany

    (Department of Industrial Engineering, Tel Aviv University, Tel Aviv 69978, Israel)

  • D. Marc Kilgour

    (Department of Mathematics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada)

  • Yigal Gerchak

    (Department of Industrial Engineering, Tel Aviv University, Tel Aviv 69978, Israel)

Abstract

Negotiations are often conducted under the stipulation that an impasse is to be resolved using final-offer arbitration (FOA). In fact, FOA frequently is not needed; in Major League Baseball, for instance, more than 80% of the salary negotiations that could go to arbitration instead reach a bargained agreement. We show that the risk aversion of at least one side explains this phenomenon. We then model pay negotiation in baseball by applying a bargaining solution with a variable disagreement outcome representing FOA, studying the existence of pure Nash equilibrium initial offers and their effects on the player's eventual pay, and considering the Nash solution as a special case.

Suggested Citation

  • Eran Hanany & D. Marc Kilgour & Yigal Gerchak, 2007. "Final-Offer Arbitration and Risk Aversion in Bargaining," Management Science, INFORMS, vol. 53(11), pages 1785-1792, November.
    • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:11:p:1785-1792
    DOI: 10.1287/mnsc.1070.0736
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    References listed on IDEAS

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    Cited by:

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