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

Abstract

This paper focuses on the effects of nonbinding recommendations on bargaining outcomes. Recommendations are theorized to have two effects: they can create a focal point for final bargaining positions, and they can decrease outcome uncertainty should dispute persist. While the focal point effect may help lower dispute rates, the uncertainty reduction effect is predicted to do the opposite for risk-averse bargainers. Which of these effects dominates is of critical importance in the optimal design of alternative dispute resolution (ADR) procedures, which are becoming increasingly utilized to help resolve disputes in a variety of settings. We theoretically examine the effects of recommendations on the bargaining contract zone. Our theoretical framework, which allows bargainers' final positions to influence a binding outcome should negotiations fail, provides for a more stringent test of focal points than previously considered. We also present data from controlled laboratory bargaining experiments that are consistent with our model of recommendation effects. Recommendations are empirically shown to influence final bargaining positions and negotiated settlement values. Furthermore, dispute rates are significantly lower when one includes recommendations, even where the recommendation is completely ignored in final-stage arbitration. This highlights a potentially significant role for the use of nonbinding procedures, such as mediation, as a preliminary stage in developing more efficient ADR procedures.

Labor Negotiations, Conflicts, and Arbitration

“…These findings further highlight the potential benefits of de-biasing bargainers to promote negotiated settlements (Babcock et al 1997) or of encouraging perspective-taking to remove documented first-mover advantages in settlement outcomes (Galinsky and Mussweiler 2001). De-biasing may be done, for example, in the context of arbitration by implementing a stage prior to arbitration where information is revealed as to the likely outcome that an arbitrator feels is fair (Dickinson and Hunnicutt 2010).…”

Alternative dispute resolution

“…A follow-up study to the initial laboratory research includes a treatment in which a nonbinding recommendation is completely ignored in the final stage of arbitration [12].…”

Alternative dispute resolution

“…A follow-up study to the initial laboratory research included a treatment in which a nonbinding recommendation was completely ignored in the final stage of arbitration [10]. Even when the recommendation had no impact on an eventual arbitrated settlement, it helped draw the final bargaining positions together and lower the dispute rates relative to an otherwise identical treatment of conventional arbitration.…”