The Chilling Effect of Optimism: The Case of Final-Offer Arbitration

ASU Author/Contributor (non-ASU co-authors, if there are any, appear on document)
David L. Dickinson Ph.D., Professor (Creator)
Institution
Appalachian State University (ASU )
Web Site: http://www.library.appstate.edu/

Abstract: This article examines the incentive effects of final-offer arbitration (FOA) when disputants have optimistic (i.e., biased) beliefs about the arbitrator's settlement preferences. Optimism is shown to increase the divergence in Nash equilibrium final offers, and the divergence is largest under naïve, rather than sophisticated, optimism. Therefore, though FOA rules were instituted to lessen the “chilling” effect of arbitration, FOA interacts with optimism to worsen the chilling effect. Data from controlled laboratory experiments confirm that optimism leads to more divergent final bargaining positions and higher dispute rates. These results highlight the role that de-biasing expectations can play in improving bargaining outcomes.

Additional Information

Publication
Dickinson, David L. (2006) “The chilling effect of optimism: The case of final-offer arbitration.” Journal of Socio-Economics, 35(1): 17-30. Published by Elsevier (ISSN: 1053-5357) doi:10.1016/j.socec.2005.12.002
Language: English
Date: 2006