Arbitration: Dominance Solvable

This game is dominance solvable. It’s solution has the following properties

1. The equilibrium concessions made by the parties are gradual and cannot exceed 4 times the cost of the stake.
2. There is immediate arbitration if the stake is small.
3. When there is no arbitration, each party makes in turn a partial concession up to a point where it is credible that
he will not concede further unless the other does.
4. The strategic behaviour of the parties may involve wars of attrition" because at some point no party is willing to
be the 1st to concede.

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PARTY 1 PARTY 2
 Article Conclusion
Explain in a perfect information
Except when the cost of arbitration is setting 1) delays in negotiated
prohibitive relative to the size of the Arbitration agreements, 2) that concessions
pie, arbitration constraints are always
Key Feature
procedure are gradual, and 3) the emergence
binding on the equilibrium path. of wars of attrition

All contingencies cannot be foreseen

Alternative arbitration costs at the stage of the initial contract.
include, delays of implementation
Alternative Unforeseen
Arbitration costs Therefore the initial contract can only
and risk aversion with respect to contingencies
specify for unforeseen contingencies
the uncertainty of the arbitrated with some general principles
outcome

This incomplete contract idea provides a

The total concession made to
Cumulative Incomplete justification for the parties' commitment to
a party may only increase over
concession contract idea the negotiation process with arbitration
time; concessions cannot be
that we have assumed throughout the
claimed back.
paper.