David L. Dickinson Appalachian State University April 2006: GATE. Dispute Resolution David L. Dickinson Appalachian State University April 2006: GATE.

“The chilling effect of optimism: The case of final-offer arbitration “The chilling effect of optimism: The case of final-offer arbitration.” David L. Dickinson, forthcoming, Journal of Socio-Economics. Main point of the paper is potential effects of optimism in the FOA environment Dickinson (2004) discusses potential role of optimism in his dispute rate data, but beliefs were not elicited. Ashenfelter et al (1992) does not discuss optimism either, but results could be interpreted as consistent with optimism A large body of literature in psychology and economics has documented optimism in environments such as, among others, bargaining.

Theoretical Predictions in FOA Index beliefs of arbitrator settlement preferences by bargainer (i.e., no more common beliefs). Buyer beliefs now become So, Nash equilibrium final offer spread is larger this is taken to imply a larger likelihood of dispute

Experimental Evidence General environment follows Ashenfelter, et al (1992). Expectations are elicited at the beginning of all FOA rounds (whether or not FOA is used) Monetary incentive for “accuracy” Most bargaining pairs are “optimistic” (i.e., seller belief of arbitrator x greater than buyer’s)

Final Bid forecasts Forecasts from regression of ExpDif on Final-Offer Difference subset of disputed rounds, random-effects specification In general, bargainer offers do not diverge as much as predicted by naïve optimism model

Conclusions Bargainer optimism, with respect to likely arbitrator preferences, theoretical causes final offer divergence in FOA Evidence from controlled laboratory experiments show evidence of optimism, and data are consistent with the hypothesis that optimism causes final offer divergence (and higher dispute rates) Evidence is more consistent with a sophisticated model of optimism in which bargainers update their beliefs to some extent (Figures 2 and 4)