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Economics Research Institute Study Paper




Utah State University Department of Economics

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This paper presents results from a controlled laboratory study of bargaining behavior and dispute rates under three types of arbitration procedures. Two of these-conventional and final-offer arbitration-are commonly used in practice, while an innovative procedure called "Combined Arbitration" (Brams and Merrill 1986) is not currently used. Combined Arbitration combines the rules of the two most commonly used forms of binding arbitration (conventional and final-offer arbitration) in such a way as to generate convergent final offers in theory. Controlled laboratory results show, however, that disputes are most likely in Combined Arbitration and least likely in conventional arbitration. These results challenge the theoretical predictions of Combined Arbitration as well as the hypothesis that final-offer arbitration would be more likely to reduce disputes compared to conventional arbitration. The results may be consistent with the hypothesis that disputants are relatively optimistic about the arbitrator's notion of a fair settlement. Implications of these findings are also discussed.