The Impact of Compulsory Arbitration on Bargaining Behavior: An Experimental Study

A series of experiments compares bargaining behavior 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 evidence 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 splits have doubled to 80%. The experiment shows final offer arbitration, though having lower dispute rates, to interfer 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. --Bargaining,Arbitration,Experiments,Fair Awards

Bargaining and sustainability: the Argentine debt swap of 2005

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a supermajority of creditors accepted a swap implying a recovery rate of around 37 cents in the dollar. In this paper a bargaining approach is used to explain both the settlement and the delay. We conclude that the agreed swap broadly corresponds to a bargaining outcome where the Argentine government had “first mover” advantage: and that substantial delay occurred as negotiators seeking a sustainable settlement waited for economic recovery. Factors not explicit in the formal framework are also considered -- heterogeneity of creditors, for example, and the role of third parties in promoting “good faith” bargaining

Finite Alternating-Move Arbitration Schemes and the Equal Area Solution

We start by considering the Alternate Strike (AS) scheme, a real-life arbitration scheme where two parties select an arbitrator by alternately crossing off at each round one name from a given panel of arbitrators. We find out that the AS scheme is not invariant to “bad” alternatives. We then consider another alternating-move scheme, the Voting by Alternating Offers and Vetoes (VAOV) scheme, which is invariant to bad alternatives. We fully characterize the subgame perfect equilibrium outcome sets of these above two schemes in terms of the rankings of the parties over the alternatives only. We also identify some of the typical equilibria of these above two schemes. We then analyze two additional alternating-move schemes in which players’ current proposals have to either honor or enhance their previous proposals. We show that the first scheme’s equilibrium outcome set coincides with that of the AS scheme, and the equilibrium outcome set of the second scheme coincides with that of the VAOV scheme. Finally, it turns out that all schemes’ equilibrium outcome sets converge to the Equal Area solution’s outcome of cooperative bargaining problem, if the alternatives are distributed uniformly over the comprehensive utility possibility set and as the number of alternatives tends to infinity.The Federal Mediation and Conciliation Service (FMCS), the Alternate Strike (AS) scheme, the Voting by Alternating Offers and Vetoes (VAOV) scheme, the Enhancing Past Concessions scheme, the Honoring Past Concessions scheme, the Equal Area solution.

Lab Labor: What Can Labor Economists Learn from the Lab?

This paper surveys the contributions of laboratory experiments to labor economics. We begin with a discussion of methodological issues: why (and when) is a lab experiment the best approach; how do laboratory experiments compare to field experiments; and what are the main design issues? We then summarize the substantive contributions of laboratory experiments to our understanding of principal-agent interactions, social preferences, union-firm bargaining, arbitration, gender differentials, discrimination, job search, and labor markets more generally.personnel economics, principal-agent theory, laboratory experiments, labor economics

Bargaining with Incomplete Information

A central question in economics is understanding the difficulties that parties have in reaching mutually beneficial agreements. Informational differences provide an appealing explanation for bargaining inefficiencies. This chapter provides an overview of the theoretical and empirical literature on bargaining with incomplete information. The chapter begins with an analysis of bargaining within a mechanism design framework. A modern development is provided of the classic result that, given two parties with independent private valuations, ex post efficiency is attainable if and only if it is common knowledge that gains from trade exist. The classic problems of efficient trade with one-sided incomplete information but interdependent valuations, and of efficiently dissolving a partnership with two-sided incomplete information, are also reviewed using mechanism design. The chapter then proceeds to study bargaining where the parties sequentially exchange offers. Under one-sided incomplete information, it considers sequential bargaining between a seller with a known valuation and a buyer with a private valuation. When there is a "gap" between the seller's valuation and the support of buyer valuations, the seller-offer game has essentially a unique sequential equilibrium. This equilibrium exhibits the following properties: it is stationary, trade occurs in finite time, and the price is favorable to the informed party (the Coase Conjecture). The alternating-offer game exhibits similar properties, when a refinement of sequential equilibrium is applied. However, in the case of "no gap" between the seller's valuation and the support of buyer valuations, the bargaining does not conclude with probability one after any finite number of periods, and it does not follow that sequential equilibria need be stationary. If stationarity is nevertheless assumed, then the results parallel those for the "gap" case. However, if stationarity is not assumed, then instead a folk theorem obtains, so substantial delay is possible and the uninformed party may receive substantial surplus. The chapter also briefly sketches results for sequential bargaining with two-sided incomplete information. Finally, it reviews the empirical evidence on strategic bargaining with private information by focusing on one of the most prominent examples of bargaining: union contract negotiations.Bargaining; Delay; Incomplete Information

A non-cooperative foundation for the continuous Raiffa solution

This paper provides a non-cooperative foundation for (asymmetric generalizations of) the continuous Raiffa solution. Specifically, we consider a continuous-time variation of the classic Ståhl–Rubinstein bargaining model, in which there is a finite deadline that ends the negotiations, and in which each player’s opportunity to make proposals is governed by a player-specific Poisson process, in that the rejecter of a proposal becomes proposer at the first next arrival of her process. Under the assumption that future payoffs are not discounted, it is shown that the expected payoffs players realize in subgame perfect equilibrium converge to the continuous Raiffa solution outcome as the deadline tends to infinity. The weights reflecting the asymmetries among the players correspond to the Poisson arrival rates of their respective proposal processes

The Effect of Entitlements and Equality on Cooperative Bargaining with Private, Unverifiable Information

In many bargaining situations a third party is authorized to impose a backstop position on the bargainers. Prominent examples include governments who use collaborative policymaking between stakeholders to set public policy, but also compulsory arbitration in labour negotiations. Axiomatic models of cooperative bargaining, such as the Nash bargain, presume that the status quo allocation will have no effect on the outcome parties reach if it differs from the backstop set by the third party. In contrast, experimental findings have suggested that both equality of outcomes and entitlement (where the status quo establishes a focal point) may affect the agreements bargainers reach, at least under full information. This paper extends the investigation of the effect of equality and entitlement on cooperative bargaining to the case where parties have private, unverifiable information concerning the value of outcomes. We use a two-party, two-attribute experimental design in which subjects take part in unstructured, face-to-face bargaining to jointly select from among approximately 200 potential outcomes. We find that, relative to full information, parties who bargain under private information are almost as likely to reach agreements as those under full information, and that these agreements are still approximately Pareto efficient. Further, the effect of the status quo (rather than backstop) allocation seems amplified under private information, while the effect of equality is dampened, but not eliminated.cooperative bargaining; private information; Nash bargain; egalitarian; entitlement; fairness; focal points

Bargaining and hold-up : the role of arbitration

This paper analyses arbitration as a surrogate for complete contracts. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make productive-enhancing, relationship- specific investments, and then negotiate over the division of the resultant sur- plus. It is shown that the mere presence of the arbitrator (in the background of negotiations) may enhance investment incentives ex-ante by minimising each party's ability to engage in hold-up behaviours ex-post. Furthermore, we highlight notably that the partners should optimally commit to call an arbi- trator ensuring a compromise by awarding a reasonable share of the surplus to the worker. Indeed, this type of arbitrator would harmonise the parties' bargaining powers and then weight their investment incentives optimally