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Bargaining and Hold-up: The Role of Arbitration

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  • Yannick Gabuthy
  • Abhinay Muthoo

Abstract

This paper presents an “incomplete contracting” model of arbitration. A fundamental notion that underlies our analysis is that it is optimal (in terms of promoting productivity-enhancing, relationship-specific investments) to determine ex-ante – well before arbitration would actually be required (if at all) – whether or not parties would engage the services of an arbitrator in the eventuality that they fail to resolve any disputes by themselves. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make (non-contractible) investments, and then negotiate over the division of the resultant surplus, which, if previously agreed, occurs in the shadow of arbitration. We derive several results and insights concerning whether or not it is optimal for the parties to commit to call an arbitrator, in terms of arbitrator-preference and technological parameters.

Suggested Citation

  • Yannick Gabuthy & Abhinay Muthoo, 2018. "Bargaining and Hold-up: The Role of Arbitration," Working Papers of BETA 2018-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2018-04
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    File URL: http://beta.u-strasbg.fr/WP/2018/2018-04.pdf
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    References listed on IDEAS

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    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, September.
    3. Cary Deck & Amy Farmer & Dao-Zhi Zeng, 2007. "Amended final-offer arbitration over an uncertain value: A comparison with CA and FOA," Experimental Economics, Springer;Economic Science Association, vol. 10(4), pages 439-454, December.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Bloom, David E, 1986. "Empirical Models of Arbitrator Behavior under Conventional Arbitration," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 578-585, November.
    6. Henry S. Farber, 1980. "An Analysis of Final-Offer Arbitration," Journal of Conflict Resolution, Peace Science Society (International), vol. 24(4), pages 683-705, December.
    7. Zeng, Dao-Zhi, 2003. "An amendment to final-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 46(1), pages 9-19, August.
    8. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    9. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-460, March.
    10. Armstrong, Michael J. & Hurley, W. J., 2002. "Arbitration using the closest offer principle of arbitrator behavior," Mathematical Social Sciences, Elsevier, vol. 43(1), pages 19-26, January.
    11. Farber, Henry S & Bazerman, Max H, 1986. "The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration," Econometrica, Econometric Society, vol. 54(6), pages 1503-1528, November.
    12. Manzini, Paola & Mariotti, Marco, 2001. "Perfect Equilibria in a Model of Bargaining with Arbitration," Games and Economic Behavior, Elsevier, vol. 37(1), pages 170-195, October.
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    Cited by:

    1. Park, Se Mi, 2024. "Commercial arbitration regime and sourcing decision," International Review of Law and Economics, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Arbitration; Non-Contractible Investments; Hold-up; Bargaining.;
    All these keywords.

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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