Carl Stevens removes arbitrator compromise power

Labor and commercial disputes that couldn't be resolved through direct negotiation often ended up in front of an arbitrator empowered to hear both sides and issue a binding decision — and in practice, arbitrators facing two competing positions very often landed somewhere between them, a pattern both sides came to expect.

Labor economist Carl Stevens studied this dynamic and, in a 1966 paper, argued that conventional arbitration actively discouraged the honest bargaining it was supposed to produce, because knowing a compromise was coming gave both sides every reason to posture rather than negotiate in good faith.

Stevens proposed final-offer arbitration: instead of hearing both sides and crafting whatever settlement seemed fair, the arbitrator would be handed exactly two numbers — each side's best and final offer — and required to pick one of them in full, with no power to split the difference or compromise at all.

Removed the arbitrator's power to compromise: forced to pick one full offer, making extreme numbers a liability and flipping incentives toward reasonable positions.

Because the arbitrator in final-offer arbitration can only choose one side's number in full, an extreme, self-serving offer becomes a liability rather than an advantage — it makes the other side's num

It only disciplines behavior if both sides genuinely fear losing outright — a party confident the arbitrator will side with them regardless of how extreme their number is, because of bias, precedent,

When a mediator or decision-maker is expected to compromise between two positions, both sides are incentivized to open with an extreme, padded position to pull the eventual compromise toward their sid

Major League Baseball adopted final-offer arbitration for player salary disputes in the 1973-74 offseason, and the mechanism has held ever since: because an unreasonable filing risks losing entirely to the other side's more defensible number, most cases that reach a formal filing still settle before an actual hearing takes place, as each side recalibrates once it sees how a genuinely reasonable version of the other's number would compare to its own.