Working Paper: NBER ID: w2547
Authors: Robert S. Gibbons
Abstract: This paper analyzes strategic communication in equilibrium models of conventional and final-offer interest arbitration. Both models emphasize the role of learning by the arbitrator from the parties offers about the state of the employment relationship, which is known to the parties but not to the arbitrator. In both models, the arbitrators equilibrium behavior is identical to the reduced-form decision rule typically assumed in the empirical literature. The paper thereby provides a structural interpretation for the existing empirical work. The paper also represents progress towards a complete theory of arbitration because it satisfies three conditions that will be required of any such theory. First, the models predictions match the existing empirical evidence. Second, the models describe equilibrium behavior. And third, the models are built on a common set of assumptions about preferences, information, and commitment. The paper therefore not only provides an equilibrium foundation for the intuition that the arbitrator might learn from the parties offers, but also uses the idea of learning to develop a unified analytical treatment of the two major forms of interest arbitration.
Keywords: Arbitration; Strategic Communication; Equilibrium Models
JEL Codes: J52; C70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| offers (D44) | arbitrator's decision (J52) |
| arbitrator's decision (J52) | learning process (J24) |
| offers (D44) | learning process (J24) |
| arbitrator's decision (J52) | ideal settlement (R28) |
| hidden state of employment relationship (J63) | arbitrator's decision (J52) |
| offers (D44) | arbitrator's ideal settlement (J52) |