Risk and Information in Dispute Resolution: An Empirical Study of Arbitration

Abstract

We develop and estimate a structural model of arbitration, accounting for asymmetric risk attitudes and learning. Using data on public sector wage disputes in New Jersey, we compare the efficiency of two popular arbitration formats: final offer and conventional. We find that although conventional arbitration hinders the transmission of case-relevant information from the disputants to the arbitrator, this format outperforms final offer arbitration by affording discretion to select awards. We also assess how risk attitude differences between the disputants affect imbalances in arbitration outcomes, finding that risk aversion weakens a party’s position in the dispute despite making them more likely to win arbitration.