Alpha-Final Offer Arbitration: The Best Way to Avoid Negotiation Failure
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Under the arbitration mechanisms most used in the field, Final-Offer Arbitration (FOA) and Conventional Arbitration (CA), the negotiators still do not reach high agreement rates by themselves. This paper presents an experiment to evaluate a new arbitration mechanism: α-Final Offer Arbitration (α-FOA). This mechanism is similar to a second-price auction, which punishes the loser with a value (α) proportional to the difference between her final offer and the arbitrator’s fair settlement. The experiment also divides the pool of subjects within a session into two groups according to their estimated risk preferences in order to assess how the contract zone depends on the relative risk preferences of the subjects involved in negotiation. Although agreement rates overall are low, the results show that α-FOA has a significantly higher agreement rate than both CA and FOA. Contrary to theoretical prediction, the more-risk-averse group of subjects does not have a higher agreement rate than the less-risk-averse group.
KeywordsNegotiation Arbitration Experiments Risk preferences Contract zone
JEL ClassificationC9 J52 D74
I would like to thank to Timothy Cason for all the support and continued guidance on this paper. I also thank Stephen Martin, Ralph Siebert, Justin Tobias, and two anonymous referees for their valuable comments. All remaining errors are my own.
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