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Amended Final-offer Arbitration Outperforms Final-offer Arbitration

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  • Dao-Zhi Zeng

Abstract

Amended final-offer arbitration (AFOA) has been developed as an attractive alternative mechanism to final-offer arbitration (FOA). Under AFOA, more reasonable offers win, but the outcome is determined by the loser's offer and the arbitrator's value. In AFOA, disputants making extreme offers are penalized, thereby encouraging compromise. This article compares the theoretical and behavioral properties of AFOA and FOA. Controlled laboratory experiments indicate that AFOA significantly outperforms FOA, generating substantially greater prearbitration settlement. Consistent with theoretical predictions, offers converge under AFOA; however, FOA offers neither converge nor are consistent with theoretical predictions. This work suggests practitioners should consider adopting AFOA over FOA. Copyright 2007, Oxford University Press.

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  • Dao-Zhi Zeng, 2007. "Amended Final-offer Arbitration Outperforms Final-offer Arbitration," American Law and Economics Review, American Law and Economics Association, vol. 9(2), pages 384-407.
    • Handle: RePEc:oup:amlawe:v:9:y:2007:i:2:p:384-407
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    File URL: http://hdl.handle.net/10.1093/aler/ahm012
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    Cited by:

    1. Schweinzer, Paul, 2010. "Sequential bargaining with common values," Journal of Mathematical Economics, Elsevier, vol. 46(1), pages 109-121, January.
    2. Deck, Cary A. & Farmer, Amy, 2009. "Strategic bidding and investments in final offer arbitration: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 361-373, May.
    3. Pecorino, Paul & Solomon, Michael & Van Boening, Mark, 2021. "Bargaining with voluntary transmission of private information: An experimental analysis of final offer arbitration," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 334-366.

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