CFDP 551

Incentive Arbitration and Time-Related Bargaining Costs


Publication Date: April 1980

Revision Date: February 1981

Pages: 15


In the context of the Nash Bargaining Problem an arbitrator is supposed to choose a solution point on the basis of ‘fairness’ requirements. By introducing time-related costs to the parties’ utility functions, a new class of arbitration changes the rules of the negotiations, and particularly the parties’ payoffs, and lets the parties negotiate. The changes are such that one or both parties are reimbursed by the arbitrator for their bargaining costs. A procedure in which only the party who makes the final concession is compensated, leads (in the case of complete information) to single dominating equilibrium strategies and to a unique solution. This solution can also serve as an arbitration point in the traditional sense.