An Examination of Dispute Resolution Mechanisms when Agents Make Decisions Under Uncertainty

University Of Arkansas, Fayetteville AR

Investigators

Abstract

Increasingly, arbitration is being used to settle disputes. Because traditional litigation is more costly and requires a greater degree of disclosure than arbitration, many companies prefer arbitration to settle disputes. The inclusion of clauses in a variety of contracts which stipulate arbitration as the dispute mechanism is ever increasing, a phenomenon which has been bolstered by the U.S. Supreme Courts decision that employers can force workers to use binding arbitration to settle labor disputes. With this increasing reliance on arbitration and the availability of choices as to its structure, it is important to understand the ramifications of the specific form of arbitration being employed. Predominantly arbitration takes one of two forms, "conventiona" where the arbiter unilaterally decides the outcome and "final offer" where the arbiter has to select from proposals offered by the disputants. This project examines the theoretical and behavioral properties of these common forms of arbitration as well as other less prominent methods. Specifically, the project examines the role of uncertainty regarding the value of the issue under dispute. For example, in a labor dispute the market value of the worker's output may be unknown when the wage is negotiated. The specific guidelines of alternative arbitration mechanisms coupled with uncertainty generate a variety of strategies each bargainer might undertake. By systematically varying the uncertainty and the arbitration method, this study identifies what outcomes are likely to arise in particular situations, thereby enabling more informed decisions by individuals, consumer groups, businesses and others facing arbitration. This research will also serve to inform policy makers about potential structural biases as arbitration continues to serve as a substitute for court proceedings.