Final-Offer Arbitration and Risk Aversion in Bargaining

Eran Hanany (), D. Marc Kilgour () and Yigal Gerchak ()
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Eran Hanany: Department of Industrial Engineering, Tel Aviv University, Tel Aviv 69978, Israel
D. Marc Kilgour: Department of Mathematics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada
Yigal Gerchak: Department of Industrial Engineering, Tel Aviv University, Tel Aviv 69978, Israel

Management Science, 2007, vol. 53, issue 11, 1785-1792

Abstract: Negotiations are often conducted under the stipulation that an impasse is to be resolved using final-offer arbitration (FOA). In fact, FOA frequently is not needed; in Major League Baseball, for instance, more than 80% of the salary negotiations that could go to arbitration instead reach a bargained agreement. We show that the risk aversion of at least one side explains this phenomenon. We then model pay negotiation in baseball by applying a bargaining solution with a variable disagreement outcome representing FOA, studying the existence of pure Nash equilibrium initial offers and their effects on the player's eventual pay, and considering the Nash solution as a special case.

Keywords: games and group decisions; bargaining; risk aversion; final-offer arbitration; Nash equilibrium (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (7)

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