Two widely used forms of arbitration are conventional arbitration, in which the arbitrator makes an unconstrained settlement choice, and final-offer arbitration, in which the arbitrator must choose between disputants' final offers. Under an innovative, as yet unused approach called "combined arbitration," if the arbitrator's notion of a fair settlement lies between the disputants' final offers, final-offer arbitration rules are used; otherwise, conventional arbitration rules are used. Theoretically, by combining the risks that the two standard forms of arbitration pose for disputants who do not voluntarily settle, combined arbitration should generate convergent final offers. The results of this controlled laboratory study show, however, that dispute rates are highest in combined arbitration and lowest in conventional arbitration. These results challenge the theoretical predictions for combined arbitration as well as claims that final offer arbitration should reduce disputes compared to conventional arbitration. The results are, however, consistent with a simple theory of disputant optimism.This article reports the results from a laboratory test of disputant behavior under three different forms of arbitration: conventional arbitration (CA), final-offer arbitration (FOA), and an innovative procedure -as yet untried in real-world cases -called "Combined Arbitration" (CombA) that combines elements of CA and FOA. In CA, the arbitrator is free to impose any settlement, whereas the rules of FOA stipulate that the arbitrator is constrained to choose one of the disputants' final offers. FOA was originally designed to increase the uncertainty costs of arbitration and to induce more settlements, but much of the theoretical work on FOA has cast doubt on that expectation. [1] Brams and Merrill (1986) devised the CombA procedure by combining the rules of CA and FOA in a way that generates theoretically convergent final offers.[2] The rules of CombA are simple. If the arbitrator's notion of a fair settlement lies between the disputants' final offers, then the rules of FOA are used. Otherwise, the rules of CA are used. If the CombA rules generate convergent final offers in practice, and not just in theory, then CombA offers a potential major advantage over commonly used arbitration procedures: increased voluntary settlement rates. Disputants presumably prefer voluntary settlements over arbitrated settlements, and they would also save substantial time and money by invoking arbitration less frequently.My primary goal in this article is to examine CombA's relative effectiveness. A secondary goal is to provide additional data comparing CA and FOA. Existing research contains mixed or inconclusive reports on the effectiveness of CA versus FOA, and this debate is far from resolved.[3] As will be discussed, the comparison of CA and FOA in this paper improves on previous laboratory comparisons in several ways.
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