An Analysis of Final-Offer Arbitration

Henry S. Farber

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123 Scopus citations


A model of the final-offer arbitration (FOA) process is developed, and the Nash equilibrium pair of final offers is derived. It is shown that the more risk-averse party submits a more reasonable offer so that it has a higher probability of being chosen by the arbitrator. The contract zone of potential negotiated settlements is derived, and its size is shown to be directly related to the uncertainty of the parties concerning the arbitrators' preferences. However, the final offers of the parties diverge where there is increased uncertainty, so that there is a trade-off between the size of the contract zone and the extremity of arbitrated awards when negotiations do fail. Finally, it is shown that negotiated settlements under FOA are skewed against the more risk-averse party.

Original languageEnglish (US)
Pages (from-to)683-705
Number of pages23
JournalJournal of Conflict Resolution
Issue number4
StatePublished - Dec 1980

All Science Journal Classification (ASJC) codes

  • General Business, Management and Accounting
  • Sociology and Political Science
  • Political Science and International Relations


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