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Group Decision and Negotiation

Erschienen in:

06.09.2019

Alpha-Final Offer Arbitration: The Best Way to Avoid Negotiation Failure

verfasst von: Daniel M. Nedelescu

Erschienen in: Group Decision and Negotiation | Ausgabe 6/2019

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Abstract

Under the arbitration mechanisms most used in the field, Final-Offer Arbitration (FOA) and Conventional Arbitration (CA), the negotiators still do not reach high agreement rates by themselves. This paper presents an experiment to evaluate a new arbitration mechanism: α-Final Offer Arbitration (α-FOA). This mechanism is similar to a second-price auction, which punishes the loser with a value (α) proportional to the difference between her final offer and the arbitrator’s fair settlement. The experiment also divides the pool of subjects within a session into two groups according to their estimated risk preferences in order to assess how the contract zone depends on the relative risk preferences of the subjects involved in negotiation. Although agreement rates overall are low, the results show that α-FOA has a significantly higher agreement rate than both CA and FOA. Contrary to theoretical prediction, the more-risk-averse group of subjects does not have a higher agreement rate than the less-risk-averse group.

Vorheriger Artikel Lie on the Fly: Strategic Voting in an Iterative Preference Elicitation Process

Nächster Artikel Assignment Games with a Central Player

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While there is no complete agreement in the literature about the relationship between the contract zone and dispute rates, Zeng’s (2006) view is the most common in the literature.

An optimistic bargainer is one whose subjective probabilities for more favorable outcomes are higher than those in the arbitrator's distribution, which can be considered “fair”.

Dickinson (2003) offers a numerical example, and illustration on how a person’s risk attitude might make the contract zone to disappear, which gives incentives to the disputants to choose the lottery versus a certain outcome.

Another study related to FOA, risk aversion, and contract zone is Hanany et al. (2007).

A print screen of this lottery choice is presented in Figure 1, in the online appendix 2 file.

See Table 1 from the online appendix 2 file.

The data show that during the experiment, there were subjects who chose values outside of their suggestion range, so they understood that these intervals were not binding.

While he fails to reject the hypothesis that buyers have unbiased beliefs (p > .10)—this is tested against the unbiased benchmark that subjects always expect x = 500, that is not the case for the sellers. However, he fails to reject the null hypothesis that the seller’s belief distribution is not different from the buyer’s.

For the last four sessions out of the total of eight, the treatment α-FOA had ten periods instead of seven, and the examples in the instructions also included a graphical representation.

See Table 2 from the online appendix 2 file.

It seems that the student did not pay attention to the instructions and made offers in which he gave away $1 from his pocket. In addition, he accepted almost any offer from his counterpart.

The fourth treatment of a session has a higher mean than the first, second, or third treatment of the session.

Based on couple of quiz questions at the beginning of each treatment, the percentage of correct answers for α-FOA treatment is much lower (21.9% for the first question, and 36.5% for the second question) compared to CA and FOA treatments (81%, and respectively 92%). Even when I calculate the percentage of students that gave an approximate answer (that is, they understood which player from their example won the arbitration, and they chose a value close to the correct answer), the percentage were 76.0%, and 69.8%. Regarding the correctness of the answers, it is important to mention that there was no monetary incentive for subjects to give the best answer; the purpose of these questions was to help them understand the instructions better.

According to the settings of the risk-elicitation method used, a risk-neutral subject should have six safe choices before she starts to choose the risky option.

This high percentage is due mainly to subject 11 from session seven and subject ten from session eight, who may not have correctly understood the task from the risk-elicitation stage. Both subjects chose only the risky option, even for the case in which the risky option gave them $0, compared to $1 from the safe option. Due to their choice, there is no contract zone for every pair that included one of them. Without taking into account their cases, the result is that 12% of cases have no contract zone for the last four sessions.

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Titel: Alpha-Final Offer Arbitration: The Best Way to Avoid Negotiation Failure
verfasst von: Daniel M. Nedelescu
Publikationsdatum: 06.09.2019
Verlag: Springer Netherlands
Erschienen in: Group Decision and Negotiation / Ausgabe 6/2019
Print ISSN: 0926-2644
Elektronische ISSN: 1572-9907
DOI: https://doi.org/10.1007/s10726-019-09633-6

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