Dispute Resolution in the Signaling Model : A Comparison of Arbitration Mechanisms

We conduct an experimental analysis of signaling games using three models of arbitration. In the signaling model, the informed party in the dispute makes a settlement demand to the uninformed party. In conventional arbitration (CA), the arbitrator is free to impose her preferred settlement. In Final Offer Arbitration (FOA), each party submits a proposal to the arbitrator who must choose one of the two proposals. In one version of FOA, settlement bargaining (which occurs separately from proposal submission) occurs prior to the submission of proposals and in one version it occurs after. We compare both settlement rates and player payoffs across these three arbitration mechanisms. We find that the dispute rate is lowest in CA and highest in FOA when settlement negotiations take place prior to the submission of proposals. The difference across these two mechanisms is 10 percentage points which is about 25% of the average dispute rate