Document Type

Article

Journal/Book Title/Conference

Economics Research Institute Study Paper

Volume

2

Publisher

Utah State University Department of Economics

Publication Date

2003

Rights

Copyright for this work is held by the author. Transmission or reproduction of materials protected by copyright beyond that allowed by fair use requires the written permission of the copyright owners. Works not in the public domain cannot be commercially exploited without permission of the copyright owner. Responsibility for any use rests exclusively with the user. For more information contact the Institutional Repository Librarian at digitalcommons@usu.edu.

First Page

1

Last Page

29

Abstract

Arbitration is a growing method of resolving disputes in varied settings. While two specific arbitration rules dominate in practice, other procedures have been hypothesized to better promote voluntary settlement. Such hypotheses require theoretical assumptions of identical bargainer expectations even though divergent expectations or optimism is considered prevalent in naturally occurring negotiations. This article examines disputant behavior in a controlled laboratory setting where point-estimates of disputant expectations are captured, thus allowing one to test the "chilling effect" hypotheses of optimism on both dispute rates and final-offer divergence. The extent of the dual chilling effect is examined for both commonly used arbitration procedures as well as for an innovative procedure that, while not used in practice, is theoretically predicted to induce final-offer convergence when expectations are unbiased. The results show that optimism is prevalent in the data, extra information does not fully de-bias the disputants, and optimism increases both dispute rates and final-offer divergence. The degree to which a final offer plays a strategic role in the arbitration institution is an important determinant of this final chilling effect result. Lastly, once the effects of optimism are considered, the innovative arbitration procedure actually generates the highest dispute rates, contrary to its theoretical claim.

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