Bargaining with split-the-difference arbitration

We analyze an alternating-offer model in which an arbitrator uses the splitthe-difference arbitration rule to determine the outcome if both players’ offers are rejected by the opponents. We find that the usual chilling effect of split-the-difference arbitration only arises when the discount factor is sufficiently large. When the discount factor is sufficiently small, players tend to reach agreement immediately. When the discount factor is in the middle range, delayed agreements might arise. We also find that as long as players are not excessively impatient, then the player who makes the first offer obtains an equilibrium payoff that is not greater than his opponent.