Final-Offer Arbitration

In final-offer arbitration the two parties to a dispute submit final offers to an arbitrator. The arbitrator then chooses as the binding solution that offer which is closest to his own view of the appropriate outcome. Because the disputants are imperfectly informed about the arbitrator's preferences, final-offer arbitration can be modeled as a game of imperfect information. Interesting questions arise concerning the nature of the optimal strategies and how they are affected by different characteristics of the arbitrator and the disputants.

We provide conditions for an equilibrium to exist in a final-offer arbitration game when there are k issues, the probability function is not specified and the disputants are either risk averse or risk neutral. Furthermore, the players may have differing beliefs about the arbitrator's probability function. We demonstrate that increased risk aversion by one of the parties will result in both players choosing positions farther away from the more risk averse party. We also discover the affect of bias (as well as the effect of increased sensitivity) by the arbitrator on the positions taken by the players.