Comparative Arbitration Procedures: The Role of Expectations in Dispute Rates

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Bargaining disagreements are often quite costly, and so a thorough understanding of the determinants of bargaining failure and the effectiveness of different procedures to resolve disputes is needed. This research will study arbitration procedures, and one key objective of this research is to examine dispute resolution under different forms of arbitration. That is, how do different arbitration rules affect bargaining outcomes? This research will examine an innovative arbitration procedure as well as currently used procedures. It is important to investigate dispute resolution with this innovative procedure because it theoretically promises to resolve disputes more effectively than procedures currently used in practice. This research will also investigate the role that bargainer expectations play in disputes. If bargainers view information about likely arbitration settlements in an optimistic way (i.e., each bargainer's perceptions of likely settlements are biased in his/her favor), then these optimistic expectations may significantly contribute to the likelihood that the bargainers will arbitration rather than negotiate their own settlement. Specifically, one can show theoretically that optimistic expectations will likely reverse the ordering of least to most effective arbitration procedure from among those studied in this project. This research will examine the aforementioned issues using a controlled laboratory bargaining environment that allows for manipulation of bargainer expectations and arbitration rules used at bargaining impasse. Paid laboratory subjects will negotiate over the value of a generic variable (i.e., the item of value created for the lab environment), which generates higher payoffs to one bargainer for lower negotiated values but higher payoffs to the other bargainer for higher negotiated values of the variable. As such, the lab creates a conflict of interest (i.e., a dispute) in terms of payoff potential in the negotiations. Bargaining rounds of fixed length will utilize different sets of arbitrations rules in different rounds to resolve disputes that remain at the end of the round. The experimental environment will also manipulate subject expectations by providing a more distilled (and objective) form of information about likely arbitrated settlements for bargaining pairs in half of the experiments. Statistical analysis of the results from this research will reveal which arbitration procedure is most effective at limiting disputes and will also identify the separate contribution of bargainer expectations.