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

This paper studies arbitration, a widespread dispute resolution method. We develop an arbitration model where disputing parties choose strategic actions given asymmetric risk attitudes and learning by the arbitrator. We also model arbitration's effect on negotiated settlements. Upon establishing identification, we estimate the model using public sector wage disputes in New Jersey. Counterfactual
simulations find that the more risk-averse party obtains superior outcomes in arbitration but inferior outcomes upon accounting for negotiated settlements. Simulations comparing two popular arbitration designs final-offer and conventional – support the view that final-offer arbitration leads to less divergent offers and superior
information revelation but higher-variance awards.