An Analysis and Evaluation of Final Offer Arbitration

Final offer arbitration (FOA) and conventional arbitration (ARE) are compared as mechanisms for settling labor disputes. It is recognized that the parties can manipulate their final offers under FOA in order to achieve a more desirable outcome, and the equilibrium pair of final offers is derived as a function of the uncertainty about the arbitrator's award and the relative risk preferences of the parties. Contract zones are derived for both FOA and ARB, and it is shown that the FOA induced contract zone is not unambiguously larger than that induced by ARB. This is contrary to the claims made by supporters of FOA. The quality of negotiated and arbitrated settlements are compared for the two procedures, and it found that both types of settlements are likely to be of lower quality under FOA than under ARB. It is concluded that FOA is not superior to ARB as a dispute settlement procedure because it promotes neither more negotiation nor higher quality settlements.