Arbitration systems and negotiations

We consider a model of bargaining by concessions where agents can terminate negotiations by accepting the settlement of an arbitrator. The impact of pragmatic arbitrators-that enforce concessions that precede their appointment-is compared with that of arbitrators that act on principle-ignoring prior concessions. We show that while the impact of arbitration always depends on how costly that intervention is relative to direct negotiation, the range of scenarios for which it has an impact, and the precise effect of such impact, does change depending on the behavior-pragmatic or on principle-of the arbitrator. Moreover the requirement of mutual consent to appoint the arbitrator matters only when he is pragmatic. Efficiency and equilibrium are not aligned since agents sometimes reach negotiated agreements when an arbitrated settlement is more efficient and vice versa. What system of arbitration has the best performance depends on the arbitration and negotiation costs, and each can be optimal for plausible environments.