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A ‘divide and choose’ approach to compromising

Peter Postl ()

Economics Letters, 2013, vol. 119, issue 2, 204-209

Abstract: We study dispute resolution in the compromise model of Börgers and Postl (2009), which provides an alternative framework for analyzing the real-world procedure of tri-offer arbitration studied in Ashenfelter et al. (1992). Two parties involved in a dispute have to choose between their conflicting positions and a compromise settlement proposed by a neutral mediator. We ask how an adaptation of the familiar ‘divide and choose’ mechanism (DCM) performs as a protocol for dispute resolution in the absence of an arbitrator. We show that there is a unique equilibrium of the DCM if the parties’ von Neumann Morgenstern utilities from the compromise settlement are drawn independently from a concave distribution, or from any Beta-distribution (which need not be concave). Furthermore, for Beta-distributions that concentrate increasing probability mass on high von Neumann Morgenstern utilities of the compromise, the social choice rule implied by the DCM is asymptotically ex post Pareto efficient.

Keywords: Arbitration; Divide and choose; Collective decision making; Private information (search for similar items in EconPapers)
JEL-codes: C72 D71 D82 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.econlet.2013.02.019

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