Final-offer arbitration with a bonus

Steven Brams, Samuel Merrill

    Research output: Contribution to journalArticle

    Abstract

    Final-offer arbitration (FOA) is an arbitration procedure, used in about a dozen states and some professional sports, under which the arbitrator is restricted to choosing one or the other of two 'final offers' proposed by two parties to a dispute. Modeled as a two-person, zero-sum game of imperfect information, in which the parties are assumed to know the probability distribution of the arbitrator's fair settlements and to make final offers to maximize their expected payoffs, FOA does not induce the two parties to converge but rather to make final offers usually two or more standard deviations apart. However, if either or both parties attach added value to winning per se (i.e., by having their offer chosen) - independent of the value of the settlement - then the Nash equilibrium final offers will tend to be drawn together and, in some cases, converge. Arbitration data from New Jersey appear to be consistent with the predictions of this model.

    Original languageEnglish (US)
    Pages (from-to)79-92
    Number of pages14
    JournalEuropean Journal of Political Economy
    Volume7
    Issue number1
    DOIs
    StatePublished - 1991

    Fingerprint

    arbitration
    professional sports
    value added
    human being
    Bonus
    Arbitration
    Final-offer arbitration
    Values
    Imperfect information
    Prediction
    Added value
    Standard deviation
    Nash equilibrium
    Dispute
    Probability distribution
    Zero-sum game
    Professional sports

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Final-offer arbitration with a bonus. / Brams, Steven; Merrill, Samuel.

    In: European Journal of Political Economy, Vol. 7, No. 1, 1991, p. 79-92.

    Research output: Contribution to journalArticle

    Brams, Steven ; Merrill, Samuel. / Final-offer arbitration with a bonus. In: European Journal of Political Economy. 1991 ; Vol. 7, No. 1. pp. 79-92.
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