Do Baseball Arbitrators Simply Flip a Coin?
Paul L. Burgess, Daniel R. Marburger, and John F. Scoggins
Salary arbitration has been used to resolve disputes in major league baseball since 1974. Under this procedure, both the player and the club file an offer representing the player's proposed salary for the upcoming season. In the event the two sides are unable to reach a settlement, an independent arbitrator selects one of the two offers as the binding salary. The purpose of arbitration is not to have arbitrators determine baseball salaries but, rather, for the threat of arbitration to encourage the two sides to come to their own agreement.
Baseball's salary arbitration is more commonly referred to as final-offer arbitration (FOA). An alternative means of settling disputes is conventional arbitration (CA). Although each party submits an offer to the arbitrator under CA, the neutral party is not restricted to choosing between the offers and may select any figure as the binding settlement. Conventional arbitration has been heavily criticized for its potential "chilling effect." Assuming that the goal of the arbitrator is to be rehired in future cases (both sides typically have the power to veto arbitrators from hearing cases), the CA arbitrator may split the difference between the two offers to appease each side. Of course, if arbitrators do nothing more than split the difference between the offers, each side has an incentive to submit a more extreme offer such that an even split results in a more favorable settlement. Thus, instead of encouraging the parties to negotiate, arbitration rewards them for taking an extreme stance.
To remedy the chilling effect, Stevens ( 1976) introduced final-offer arbitration. Under FOA, the arbitrator may not compromise between the offers, but must select one of the two offers as the binding settlement. Presumably, the arbitrator will formulate his/her own notion of the ideal settlement based on the facts of the case (called the preferred award) and choose the closest offer as the award. Because the best offer will be selected as the settlement, each side has an incentive to submit a fair offer.