Article ID Journal Published Year Pages File Type
970567 The Journal of Socio-Economics 2006 14 Pages PDF
Abstract

This article examines the incentive effects of final-offer arbitration (FOA) when disputants have optimistic (i.e., biased) beliefs about the arbitrator's settlement preferences. Optimism is shown to increase the divergence in Nash equilibrium final offers, and the divergence is largest under naïve, rather than sophisticated, optimism. Therefore, though FOA rules were instituted to lessen the “chilling” effect of arbitration, FOA interacts with optimism to worsen the chilling effect. Data from controlled laboratory experiments confirm that optimism leads to more divergent final bargaining positions and higher dispute rates. These results highlight the role that de-biasing expectations can play in improving bargaining outcomes.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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