THE USE OF FINAL OFFER ARBITRATION AS A SCREENING DEVICE

Arbitration outcomes are uncertain. When risk preferences are unobserv able, players may make offers that attempt to extract the willingness of risk-averse bargaining partners to pay to avoid the uncertainties o f arbitration. When such a ''hard'' offer is made to a risk-neutral ba rgaining partner, it will be refused and arbitration will result. This is true even when the distribution of outcomes is common knowledge. I mportantly, risk preferences may be difficult to communicate, even if it is in the interest of both parties to do so.