C.2 e< WORKING PAPER ALFRED SLOAN SCHOOL OF MANAGEMENT P. ARBITRATOR DECISION MAKING: UTiEN ARE FINAL OFFERS IMPORTANT? Max H. Bazerman and Henry S. Farber July 1983 WP 1466-83 MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 ARBITRATOR DECISION MAKING: IVHEN ARE FINAL OFFERS IMPORTANT? Max H. Bazerman and Henry S. Farber July 1983 IVP 1466-83 This research was supported by National Science Foundation under grants No. SES-S207705 and No. BNS-S107551. Farber was also supported by the Sloan Foundation as an Alfred P. Sloan Research Fellow. The authors would like to thank Harry Kat; and participants in a workshop at Princeton University for helpful comments. • yj> ABSTRACT Arbitrator Decision Making: When Are Final Offers Important? Max H. Bazerman and Henry S. Farber Massachusetts Institute of Technology July 1983 Central to understanding the effect of arbitration schemes on the process of collective bargaining is understanding the process by which arbitrators make decisions. A model of arbitrator behavior in conventional arbitration is developed that allows the arbitration award to be a function of both the offers of the parties and the (exogenous) facts of the case. The weight that the arbitrator puts on the facts relative to the offers is hypothesized to be a function of the quality of the offers as measured by the difference between the offers. Two special cases of this model are derived: 1) the arbitrator bases the award strictly on the offers of the parties (split-the-dif ference ) and 2) the arbitrator bases the award strictly on the facts of the case. The model is implemented empirically using data gathered from practicing arbitrators regarding their decisions in twenty-five hypothetical cases. These data have the advantage that they allow causal inference regarding the effect on the arbitration award of the facts relative to the offers. On the basis of the estimates, both of the special case models are strongly rejected. The arbitration awards are found to be influenced by both the offers of the parties and the facts of the case. In addition, the weight put on the facts of the case relative to the offers is found to vary significantly with the quality of the offers. When the offers are of low quality (far apart) the arbitrator weights the facts more heavily and the offers less heavily. These results suggest that the naive split-the difference view of arbitrator behavior, which is the basis of the critique of conventional arbitration that has led to the adoption of final-offer arbitration, is not correct in its extreme view. On the other hand, the awards are affected by the offers so that the parties can manipulate the outcome to some extent by manipulating their offers. However, the scope for this sort of influence is limited by the finding that the offers are weighted less heavily as their quality deteriorates.