This paper reports the results of a systematic experimental comparison
of the effect of alternative arbitration systems on dispute rates. The key
to our experimental design is the use of a common underlying distribution of
arbitrator "fair" awards in the different arbitration systems. This allows
us to compare dispute rates across different arbitration procedures where we
hold fixed the amount of objective underlying uncertainty about the
arbitration awards.
There are three main findings. First, dispute rates are inversely
related to the monetary costs of disputes. Dispute rates were much lower in
cases where arbitration was not available so that the entire pie was lost in
the event of dispute. Second, contrary to conventional wisdom, the dispute
rate in a final-offer arbitration system is at least as high as the dispute
rate in comparable conventional arbitration system. Third, dispute rates are
inversely related to the uncertainty costs of disputes. Dispute rates were
lower in conventional arbitration treatments where the variance of the
arbitration award was higher and imposed greater costs on risk-averse
negotiators. Our results can also be interpreted as providing tentative
evidence that the negotiators were risk-averse on average.
*Published:
Econometrica, vol. 60, no. 6 (November 1992) pp. 1407-1433.
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