Final-offer arbitration under incomplete information

In recent years, final-offer arbitration (FOA) has become increasingly frequent means of resolving labor disputes in the private and public sectors. The present paper models FOA when each disputant has private information bearing on the true value of the case. The model characterizes the disputants’ equilibrium offer behavior and examines arbitration performance. The main conclusion is that FOA outcomes are crudely responsive to the underlying merits of the case. In its favor, FOA can be expected to be less costly to administer than arbitration procedures that attempt to extract perfect information.