The gambling effect of final-offer arbitration in bargaining

King King Li () and Kang Rong ()
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King King Li: Shenzhen University
Kang Rong: Shanghai University of Finance and Economics

Economic Theory, 2020, vol. 69, issue 2, No 8, 475-496

Abstract: Abstract We study an alternating-offer bargaining model with arbitration. Our model has two key features. First, there is a deadline in bargaining. Second, whenever the bargaining deadline is reached, an arbitrator uses final-offer arbitration to determine the outcome. We find that if players are sufficiently patient, they will always reject opponents’ offers during bargaining, and thus, the game always moves to arbitration. Our result is in sharp contrast to the usual prediction in the literature that the threat of going to final-offer arbitration encourages players to reach negotiated agreements before arbitration. Our result is due to the so-called gambling effect of final-offer arbitration that we discover.

Keywords: Bargaining; Alternating offer; Final-offer arbitration; Deadline (search for similar items in EconPapers)
JEL-codes: C78 J52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00199-018-1169-x

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