The Impact of Compulsory Arbitration on Bargaining Behavior - an Experimental Study

Abstract

A series of experiments compares bargaining behavior in a Rubinstein game under three different settings: no arbitration, conventional and final offer arbitration. Under no arbitration disputes with zero payoffs were around 10%, while the pie was equally split in less than half of the cases. Under conventional arbitration - where the arbitrator is free in choosing his award - every third negotiation ended in dispute giving incidence for a modified chilling effect. Under final offer arbitration - where the arbitrator has to award to the bargainers either one of their final offers - there was only a small increase of disputes while equal split agreements have doubled to 80%, an outcome which can be described as a destiny effect. The experiment shows final offer arbitration, though having lower dispute rates, interferes more with bargaining behavior than conventional arbitration where the bargaining behavior was similar to the no-arbitration treatment. Under final offer arbitration, negotiators adjust their bargaining strategy to the arbitrator's expected award.

Keywords: Bargaining, Arbitration, Experiments, Fair Awards

JEL Classification: C78, C91, D63