Abstract:

Final offer arbitration （FOA） is a common binding third-party conflict resolution mechanism. In this paper， reward and penalty mechanisms are introduced into a two-player FOA model， and the role of reward and penalty mechanisms in mitigating or resolving the conflict between the parties involved in the arbitration is considered. Unlike the traditional FOA model， the final offer arbitration model with reward and penalty mechanisms is a two-player non-zero-sum game model. The equilibrium bids of the arbitrators are analyzed and sufficient conditions are obtained for the existence of local equilibrium and the convergence of equilibrium bids. In this paper， it is shown that reward and punishment mechanisms have significant contribution to conflict mitigation， and can effectively promote the convergence of equilibrium bids when the rewards and punishments are sufficiently strong. the subsidy mechanism and the bid-cost mechanism are special reward-punishment mechanisms. In subsidy mechanisms with utility transfers， the mean of the equilibrium bids is the median of the distribution of fair settlements between the parties with respect to the arbitrator. In the winner-loser subsidy mechanism， the presence of subsidies is detrimental to the convergence of equilibrium bids. Under the loser-to-winner subsidy mechanism， the equilibrium bids converge when the subsidy is more than half of the difference between the equilibrium bids in the FOA without incentives or penalties. In the symmetric case， the loser-to-winner subsidy mechanism is twice as effective in converging equilibrium bids as the reward or penalty mechanism alone. The fixed bid cost does not affect the equilibrium bid， but when the bid cost function is a linear function of the bid difference， the equilibrium bid converges if the cost coefficient is not less than 0.5.

Key words: final offer arbitration, rewards, penalties, subsidy, offer cost