On the Role of Arbitration in Negotiations ¤

Two parties who discount the future negotiate on the partition of a pie of size one. Each party may in turn either make a concession to the other on what has not been conceded yet or call the arbitrator. In case of arbitration, each party endures a ̄xed cost c, and what has not been conceded yet is shared equally between the two parties. The negotiation stops when either there is nothing left to be conceded or there is arbitration. The game is dominance solvable, and its solution has the following properties: 1) The equilibrium concessions are gradual and cannot exceed 4c, which results in delays; 2) The strategic behavior of the parties may involve \wars of attrition" because at some point each party is willing not to be the ̄rst to concede.

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