An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems

Abstract

This paper reports the results of a systematic experimental comparison of the effect of alternative arbitration systems on dispute rates. The key to our experimental design is the use of a common underlying distribution of arbitrator "fair" awards in the different arbitration systems. This allows us to compare dispute rates across different arbitration procedures where we hold fixed the amount of objective underlying uncertainty about the arbitration awards. There are three main findings. First, dispute rates are inversely related to the monetary costs of disputes. Dispute rates were much lower in cases where arbitration was not available so that the entire pie was lost in the event of a dispute. This confirms the empirical importance of the so-called "chilling effect" on bargaining that has been conjectured is produced by the adoption of arbitration systems. Second, the dispute rate in a final-offer arbitration system is at least as high as the dispute rate in a comparable conventional arbitration system. Contrary to the usual argument, we find no evidence that final-offer arbitration eliminates the chilling effect. Third, dispute rates are inversely related to the uncertainty costs of disputes. Dispute rates were lower in conventional arbitration treatments where the variance of the arbitration award was higher and imposed greater costs on risk-averse negotiators. Our results can also be interpreted as providing tentative evidence that the negotiators were risk-averse on average. Finally, we find general agreement between the dispute rates in our experiment and dispute rates found in the field in comparable settings.