Does Fact-Finding Promote Settlement? Theory and a Test

Abstract

Some labor negotiations include a break in which a non-binding recommendation is made by a fact-finder as an intermediate dispute resolution procedure. There is some uncertainty, however, as to whether this fact-finding increases or reduces the likelihood of settlement.Inasmuch as fact-finding reduces uncertainty about the outcome, it may "chill" bargaining and increase the need for additional dispute resolution procedures. On the other hand, the fact-finder's recommendation may give the parties a focal point around which they are able to craft an agreement, thus reducing the incidence of disputes. Which of these effects dominates is a question that we consider using both a theoretical model and data from a controlled experimental bargaining environment.

Strategic bidding and investments in final offer arbitration: Theory and experimental evidence

“…Simply stated, we find that when people are making decisions that are publicly observable, they tend to make less extreme choices. This social improvement based upon making information publically available is similar to a recent finding by Dickinson and Hunnicutt (2005) who report that publicly observable suggestions made prior to submitting bids was beneficial. 27 In light of the findings, it would be interesting for future work to examine the omitted case in which private investments are made prior to bid submission.…”

Nonbinding recommendations: the relative effects of focal points versus uncertainty reduction on bargaining outcomes

“…Farber and Katz (1979) examine the bargaining contract zone-the region of settlements both bargainers prefer, ex ante, over arbitration-assuming that the settlement is a random draw, D, from the distribution of the arbitrator's preferred settlements. Dickinson and Hunnicutt (2005) show that a non-binding recommendation reduces the size of this contract zone both before and after the recommendation is given, under what they call "naïve" arbitration. Under naïve arbitration, the arbitrator does not place any weight on the bargainers' final offers in crafting a binding settlement.…”

“…To summarize, Dickinson and Hunnicutt (2005) highlight the two main effects that recommendations may have on bargaining. The first of these-the uncertainty effect of Farber and Katz (1979)-states that the reduction of outcome uncertainty that a suggestion brings will decrease ∆ and make dispute more likely.…”

“…As a result, our framework provides a conservative test of the potential for recommendations to reduce dispute rates. The initial results in Dickinson and Hunnicutt (2005) indicate that the focal point effect likely dominates the uncertainty effect.…”

“…Though these predictions are not consistent with the theoretical predictions of a contract zone with a known suggestion, they may be consistent with the predictions of a prior or ex ante contract zone, ∆ ea , which can be derived in the case that bargainers have yet to receive the suggestion (but have a distributional expectation of what the suggestion would be). In the ex ante case, Dickinson and Hunnicutt (2005) derive ∆ ea for the naïve arbitrator case, and the size of ∆ ea as a function of γ is Ushaped. If a smaller contract zone leads to higher dispute rates, then this implies the highest dispute rates at γ=.50, consistent with the present data.…”