Arbitrator Decision Making: When Are Final Offers Important?

Central to understanding the effect of arbitration schemes on the process of collective bargaining is understanding the process by which arbitrators make decisions. A model of arbitrator behavior inconventional arbitration is developed that allows the arbitration award to be a function of both the offers of the parties and the(exogenous) facts of the case. The weight that the arbitrator puts on the facts relative to the offers is hypothesized to be a function of the quality of the offers as measured by the difference between the offers. Two special cases of this model are derived: 1) the arbitrator bases the award strictly on the offers of the parties(split-the-difference) and 2) the arbitrator bases the award strictly on the facts of the case.The model is implemented empirically using data gathered from practicing arbitrators regarding their decisions in twenty-five hypothetical cases. These data have the advantage that they allow causal inference regarding the effect on the arbitration award of the facts relative to the offers. On the basis of the estimates, both of the special case models are strongly rejected. The arbitration awards are found to be influenced by both the offers of the parties and the facts of the case. In addition, the weight put on the facts of the case relative to the offers is found to vary significantly with the quality of the offers. When the offers are of low quality (far apart)the arbitrator weights the facts more heavily and the offers less heavily.These results suggest that the naive split-the difference view of arbitrator behavior, which is the basis of the critique of conventional arbitration that has led to the adoption of final-offer arbitration, is no correct in its extreme view. On the other hand,the awards are affected by the offers so that the parties can manipulate the outcome to some extent by manipulating their offers. However, the scope for this sort of influence is limited by the finding that the offers are weighted less heavily as their quality deteriorates.

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

The Impact of Case and Arbitrator Characteristics On Employment Arbitration Outcomes

[Excerpt] A major development in systems for the enforcement of individual employment rights is the use of alternative dispute resolution (ADR) procedures to resolve claims by employees. At their best, ADR procedures may hold the potential for greater accessibility by employees to enforcement of substantive employment rights, while avoiding burdens of excessive costs for the public and employers in processing claims. On the other hand, ADR procedures, particularly mandatory employment arbitration procedures, have also been criticized for producing the privatization of justice and denial of effective enforcement of employee rights. In this paper, we present the results of a new empirical study of employment arbitration. Despite the growing importance of employment arbitration in the workplace, empirical research on this phenomenon remains in its infancy and views on arbitration are often characterized by assumptions and anecdotal impressions. In the analysis presented here we attempt to systematically examine some of the common assumptions about the decision-making of employment arbitrators. In particular, we examine three propositions that are often injected into discussions of arbitral decision-making: 1) Arbitrators will tend to favor compromise decisions, proverbially “splitting the baby” between the two parties. 2) Arbitrators will be less inclined to award very large damage claims of the type more sometimes seen in jury decisions. 3) Arbitrators will prefer to award at least some small, token amount of damages to a party bringing a case rather than deny any recovery. We analyze these propositions using a unique dataset developed from analysis of employment arbitration case files of the American Arbitration Association (AAA), arguably the leading provider of employment arbitration services in the country

Negotiator Behavior Under Arbitration

The emerging empirical literature on the economics of arbitration has focused primarily on the behavior of arbitrators under alternative forms of arbitration. This article suggests that it is natural for empirical economists to now expand their focus to include issues related to the behavior of negotiators. In this connection, three key aspects of negotiator behavior are discussed: (1) the decision to settle a dispute voluntarily or to proceed to arbitration; (2) the strategy for selecting an arbitrator; and (3) the final bargaining position to advance before an arbitrator.

The Arbitration Profession in Transition: Preliminary Results From a Survey of the National Academy of Arbitrators

[Excerpt} In recent years, there has been a dramatic increase in the arbitration and mediation of employment-related disputes. This increase has been part of a larger shift from reliance on litigation and agency resolution of disputes to the use of alternative dispute resolution (ADR), a trend particularly evident in the employment field. Over the course of several decades employees have been granted a long list of rights and protections included in a variety of laws, ranging from antidiscrimination statutes to pension safeguards to statutory attempts to guarantee safer and healthier workplaces. The growing use of arbitration, mediation, and related techniques to resolve statutory claims arising in employment relations is largely the consequence of the high costs and long delays associated with the use of administrative agencies and the court system to resolve disputes arising under these various statutes. The growing use of ADR in employment disputes has occurred both inside and outside collective bargaining. In some union workplaces, the parties attempt to resolve statutory claims using the grievance and arbitration procedures in their collective bargaining agreements. In other union workplaces, many, if not most, statutory claims are handled outside the collective bargaining arena. Employees in many such organizations pursue their statutory claims through the normal channels of agency and judicial resolution. In a minority but growing number of union-management relationships, the parties have created procedures for resolving statutory claims that are separate or sheltered from the collective bargaining agreement. The growing use of arbitration and mediation to resolve employment disputes has been especially noteworthy in the nonunion sector. In the United States, as most people know, the proportion of the work force that is unionized has been steadily declining for over 40 years and currently stands at about 14 percent. Although the Canadian labor movement has not suffered as steep a decline as in the United States, a similar trend is apparent there. The growth of employment ADR in the nonunion sector is largely the consequence of employer attempts to avoid the high costs and long delays associated with the use of judicial and administrative means to resolve disputes. Of course, some nonunion employers are also motivated by a desire to provide their employees with fair and equitable dispute resolution procedures

The General Basis of Arbitrator Behavior: An Empirical Analysis of Conventional and Final-Offer Arbitration

A general model of arbitrator behavior in conventional and final-offer arbitration is developed that is based on an underlying notion of an appropriate award in a particular case. This appropriate award is defined as a function of the facts of the case independently of the offers of the parties. In conventional arbitration the arbitration award is argued to be a function of both the offers of the parties and the appropriate award. The weight that the arbitrator puts on the appropriate award relative to the offers is hypothesized to be a function of the quality of the offers as measured by the difference between the offers. In final-offer arbitration itis argued that the arbitrator chooses the offer that is closest to the appropriate award.The model is implemented empirically using data gathered from practicing arbitrators regarding their decisions in twenty-five hypothetical cases. The estimates of the general model strongly support the characterizations of arbitrator behavior in the two schemes. No substantial differences were found in the determination of the appropriate award implicit in the conventional arbitration decisions and the determination of the appropriate award implicitin the final-offer decisions.

Arbitrator Behavior in Public Sector Wage Disputes

This study analyzes a new set of data on the decisions of conventional arbitrators. The main goal is to draw inferences about the extent to which conventional arbitration decisions are fashioned as mechanical compromises of the parties' final offers, without reference to the exogenous facts involved in different disputes. The results of the analysis are remarkably clear: conventional arbitrators tend to split-the-difference between the parties' final offers with virtually no evidence of additional systematic reference to the facts of the cases. However, since there is a substantial amount of unexplained variance in the arbitration decisions, this evidence of mechanical compromise behavior should be viewed as characterizing the overall operation of conventional arbitration mechanisms and not the behavior of individual arbitrators in any particular case. Indeed, the results are consistent with the view that individual arbitrators pay close attention to the facts of the cases, but that there is considerable variation in the structure of different arbitrators' preference functions.

Self-Serving Assessments of Fairness and Pretrial Bargaining

A persistently troubling question in the legal-economic literature is why cases proceed to trial. Litigation is a negative-sum proposition for the litigants-the longer the process continues, the lower their aggregate wealth. Although civil litigation is resolved by settlement in an estimated 95 percent of all disputes, what accounts for the failure of the remaining 5 percent to settle prior to trial