An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems


This paper reports the results of a systematic experimental comparison
of the effect of alternative arbitration systems on dispute rates. The key to
our experimental design is the use of a common underlying distribution of
arbitrator "fair" awards in the different arbitration systems. This allows
us to compare dispute rates across different arbitration procedures where we
hold fixed the amount of objective underlying uncertainty about the
arbitration awards.
There are three main findings. First, dispute rates are inversely
related to the monetary costs of disputes. Dispute rates were much lower in
cases where arbitration was not available so that the entire pie was lost in
the event of a dispute. This confirms the empirical importance of the
so-called "chilling effect" on bargaining that has been conjectured is
produced by the adoption of arbitration systems. Second, the dispute rate in
a final—offer arbitration system is at least as high as the dispute rate in a
comparable conventional arbitration system. Contrary to the usual argument,
we find no evidence that final-offer arbitration eliminates the chilling
effect. Third, dispute rates are inversely related to the uncertainty costs
of disputes. Dispute rates were lower in conventional arbitration treatments
where the variance of the arbitration award was higher and imposed greater
costs on risk-averse negotiators. Our results can also be interpreted as
providing tentative evidence that the negotiators were risk—averse on
average. Finally, we find general agreement between the dispute rates in our
experiment and dispute rates found in the field in comparable settings.

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Econometrica ,Vol 60, No. 6, November 1992
Working Papers