Affiliation:
1. University of Arkansas, USA
2. University of Alabama, Tuscaloosa, AL, USA
Abstract
Abstract
We develop a signaling model of final offer arbitration (FOA) in which the informed party makes the final settlement demand to the uninformed party. In FOA, each party submits a proposal to an arbitrator and if no agreement is reached, the arbitrator must select one of the two submitted proposals. We analyze a “before” model of FOA in which all settlement activity occurs prior to the exchange of proposals. We characterize the pure strategy separating, equilibrium associated with this game. Relative to a model of conventional arbitration (CA), the pure strategy separating equilibrium is associated with a higher dispute rate because weak player types have an enhanced incentive to bluff in this setting. This result continues to hold in semi-pooling equilibria. Thus our model is consistent with a higher dispute rate in FOA compared to CA. We also compare the incentive to engage in costly voluntary disclosure and costly discovery (JEL K4, C7, J52).
Publisher
Oxford University Press (OUP)
Subject
Law,Organizational Behavior and Human Resource Management,Economics and Econometrics
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