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

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  • Daniel M. Nedelescu

    (University of Oklahoma)

Abstract

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.

Suggested Citation

  • Daniel M. Nedelescu, 2019. "Alpha-Final Offer Arbitration: The Best Way to Avoid Negotiation Failure," Group Decision and Negotiation, Springer, vol. 28(6), pages 1109-1128, December.
    • Handle: RePEc:spr:grdene:v:28:y:2019:i:6:d:10.1007_s10726-019-09633-6
    DOI: 10.1007/s10726-019-09633-6
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    References listed on IDEAS

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    Cited by:

    1. Farmer, Amy & Pecorino, Paul, 2024. "Proposal convergence and settlement under final offer arbitration," International Review of Law and Economics, Elsevier, vol. 77(C).
    2. Kosmopoulou, Georgia & Nedelescu, Daniel M., 2022. "The effect of a larger contract zone on agreement rates under arbitration," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 100(C).

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    More about this item

    Keywords

    Negotiation; Arbitration; Experiments; Risk preferences; Contract zone;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions

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