Splitting-the-Difference in Interest Arbitration

Abstract

This study develops two models of the behavior of interest arbitrators in which the arbitrator has some exogenous notion of an equitable settlement and yet is also influenced to some extent by the positions of the parties. The author argues that it is the arbitrator's notion of an equitable outcome that determines the positions of the parties, and empirical evidence suggesting that the arbitrator merely splits the difference is misleading. In fact, the parties are likely to position themselves around the expected arbitration award, suggesting that the expected arbitration outcome shapes the parties' bargaining positions rather than the reverse. There is nevertheless some truth to the notion that an arbitrator who is sensitive to the demands of the parties can chill bargaining. The author therefore proposes that the arbitration award be made independent of actual negotiating positions through a closed-offer mechanism.