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American Law and Economics Review Advance Access published online on October 19, 2007
American Law and Economics Review, doi:10.1093/aler/ahm012
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Copyright © The Author 2007. Published by Oxford University Press on behalf of the American Law and Economics Association.

Amended Final-offer Arbitration Outperforms Final-offer Arbitration

Cary Deck

University of Arkansas

Amy Farmer

University of Arkansas

Dao-Zhi Zeng

Kagawa University and Zhejiang University

Send correspondence to: Cary Deck, Department of Economics, University of Arkansas 402 WCOB, Fayetteville, AR 72701, USA; E-mail: cdeck@walton.uark.edu


  Abstract

Amended final-offer arbitration (AFOA) has been developed as an attractive alternative mechanism to final-offer arbitration (FOA). Under AFOA, more reasonable offers win, but the outcome is determined by the loser's offer and the arbitrator's value. In AFOA, disputants making extreme offers are penalized, thereby encouraging compromise. This article compares the theoretical and behavioral properties of AFOA and FOA. Controlled laboratory experiments indicate that AFOA significantly outperforms FOA, generating substantially greater prearbitration settlement. Consistent with theoretical predictions, offers converge under AFOA; however, FOA offers neither converge nor are consistent with theoretical predictions. This work suggests practitioners should consider adopting AFOA over FOA.

Deck and Farmer acknowledge the NSF for funding (SES-0350709), while Zeng acknowledges funding from the Japanese Ministry of Education, Culture, Sports, Science, and Technology (Grand-in-Aid for Science Research 18530179), Kagawa University, and Zhejiang University (CRPE Joint Research). All the authors are grateful to two anonymous referees, David L. Dickinson, Ken-Ichi Shimomura and participants at the International Conference of Experiments in Economic Science, the Experimental Science Association, and the International Association of Conflict Management for beneficial comments.


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