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Bargaining and Hold-up: The Role of Arbitration

Author

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  • Gabuthy, Yannick

    (University of Lorraine, University of Strasbourg, CNRS, BETA, Nancy, France)

  • Muthoo, Abhinay

    (Department of Economics, University of Warwick)

Abstract

This paper analyses arbitration as a surrogate for complete contracts. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make productive-enhancing, relationship-specific investments, and then negotiate over the division of the resultant surplus. It is shown that the mere presence of the arbitrator (in the background of negotiations) may enhance investment incentives ex-ante by minimising each party's ability to engage in hold-up behaviours ex-post. Furthermore, we highlight notably that the partners should optimally commit to call an arbitrator ensuring a compromise by awarding a reasonable share of the surplus to the worker. Indeed, this type of arbitrator would harmonise the parties' bargaining powers and then weight their investment incentives optimally.

Suggested Citation

  • Gabuthy, Yannick & Muthoo, Abhinay, 2018. "Bargaining and Hold-up: The Role of Arbitration," The Warwick Economics Research Paper Series (TWERPS) 1173, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1173
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    References listed on IDEAS

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    1. Zeng, Dao-Zhi, 2003. "An amendment to final-offer arbitration," Mathematical Social Sciences, Elsevier, vol. 46(1), pages 9-19, August.
    2. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    3. 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.
    4. 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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    6. 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.
    7. 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.
    8. 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.
    9. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, September.
    10. 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.
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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

    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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