Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: This paper studies arbitration, a widespread dispute resolution method. We develop an arbitration model where disputing parties choose strategic actions given asymmetric risk attitudes and learning by the arbitrator. We also model arbitration's effect on negotiated settlements. Upon establishing identification, we estimate the model using public sector wage disputes in New Jersey. Counterfactual simulations find that the more risk-averse party obtains superior outcomes in arbitration but inferior outcomes upon accounting for negotiated settlements. Simulations comparing two popular arbitration designs—final-offer and conventional—support the view that final-offer arbitration leads to less divergent offers and superior information revelation but higher-variance awards.

Written with Yunmi Kong and Xun Tang.