Do Negotiated and Arbitrated Salaries Differ under Final-Offer Arbitration?

Abstract

The authors investigate whether negotiated settlements differ from arbitrated ones under final-offer arbitration. Examining the salaries of all major league baseball players eligible to participate in final-offer arbitration between 1986 and 1991, they find that arbitration awards won by players are higher and those won by management are lower than negotiated settlements for players of comparable value. This evidence suggests that arbitrated settlements are of “low quality” relative to negotiated ones, in the sense that they tend to fall outside the bounds of potential negotiated settlements. Another implication of these findings, however, is that the bargaining agents retain substantial freedom to negotiate salaries that are not determined solely by arbitrator preferences.