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Bargaining with Voluntary Transmission of Private Information: Does the Use of Final Offer Arbitration Impede Settlement?

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  • Amy Farmer
  • Paul Pecorino

Abstract

We identify two features of final offer arbitration (FOA) which may impede settlement in a bargaining game where asymmetric information drives the failure to settle. First, under FOA the informed party has an incentive to conceal private information about the expected outcome in arbitration from his bargaining partner. Revealing this information allows the previously uninformed party to submit a more advantageous offer to the arbitrator to the detriment of the informed party. Second, in a two-type model, the uninformed player may choose to arbitrate all cases, a result which never occurs in a simple litigation game. Each player's offer directly affects the outcome of arbitration under FOA, and it is this feature that generates impediments to settlement that are not observed in a simple litigation game. Both impediments to settlement are removed if bargaining is allowed to take place after potentially binding offers have been submitted to the arbitrator. Copyright 2003, Oxford University Press.

Suggested Citation

  • Amy Farmer & Paul Pecorino, 2003. "Bargaining with Voluntary Transmission of Private Information: Does the Use of Final Offer Arbitration Impede Settlement?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 64-82, April.
    • Handle: RePEc:oup:jleorg:v:19:y:2003:i:1:p:64-82
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    Citations

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    Cited by:

    1. Marselli, Riccardo & McCannon, Bryan C. & Vannini, Marco, 2015. "Bargaining in the shadow of arbitration," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 356-368.
    2. Claudio Detotto & Riccardo Marselli & Bryan C. McCannon & Marco Vannini, 2024. "Experts and arbitration outcomes: Insights from public procurement contract disputes," Kyklos, Wiley Blackwell, vol. 77(4), pages 922-943, November.
    3. Farmer, Amy & Pecorino, Paul, 2022. "Discovery in a screening model of final offer arbitration," International Review of Law and Economics, Elsevier, vol. 69(C).
    4. Farmer, Amy & Pecorino, Paul, 2024. "Proposal convergence and settlement under final offer arbitration," International Review of Law and Economics, Elsevier, vol. 77(C).
    5. 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.
    6. Wojciech Olszewski, 2011. "A Welfare Analysis of Arbitration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 174-213, February.

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