Sunday, March 20, 2016

Questioning the Conventional Wisdom: Do Consensual Dispute Resolution Methods Produce Better Relationships?

Think of a dispute you’ve had with a person or entity that you have an ongoing relationship with, like a business, employer, co-worker, or neighbor. Was that dispute resolved between the two of you, or did it involve a third-party determination by a judge, arbitrator, superior, or some other authority? Do you think it mattered how the dispute was resolved? Would your behavior have changed if it was resolved differently?

Conflict resolution professionals and academics have long believed that voluntarily-negotiated agreements produce better long-run relationships than third-party imposed resolutions. This is because the participants can control their own destiny, tailor agreements to their liking, and feel greater ownership in the process and the outcome. Sounds sensible. But there is very little evidence beyond the parties feeling satisfied immediately after resolution. Maybe a formal procedure like a courtroom or arbitration hearing provides greater levels of due process, or the process doesn’t really matter for a long-term relationship because people forget what happened. More research is needed to find out if the conventional wisdom really is accurate.

So in a paper with my colleague Aaron Sojourner and a University of Minnesota human resources Master’s alum Jaewoo Jung, we analyze data from Major League Baseball to test whether voluntarily-negotiated agreements produce better long-run relationships than third-party imposed resolutions. Baseball players with between three (sometimes two) and six years of service are eligible for salary arbitration with their current team. In any given year, some go to arbitration while many settle voluntarily. If voluntarily-negotiated agreements are meaningfully better, then in the following season we would expect to see better on-field performance and more lasting relationships for those who voluntarily reached a salary agreement compared to those who went to arbitration and had a new salary imposed on them.

Indeed, in 1974 Minnesota Twins pitcher Dick Woodson won the very first arbitration hearing but was traded to the richer New York Yankees less than three months later. So the ability to tailor contractual outcomes to the fit the parties’ preferences can be constrained by the arbitration process, and as a result, the parties to a consensual agreement might be more satisfied which results in stronger on-field performance and a longer lasting relationship. But is this just an isolated example?

Using 24 years of data comparing players who arbitrated with those who settled just before arbitrating, we find partial support for the conventional wisdom. We find that relationships are more durable when the player and club negotiate a new salary rather than having a salary imposed by an arbitrator. Specifically, 11 percent of players who settle voluntarily are not with the same team by the end of the season. On average, this probability of a break-up increases by 10 percentage points when a player goes to arbitration, even after controlling for prior player performance and other factors. In other words, arbitration nearly doubles the likelihood of a player not being with the same team at the end of the season.

But do players who go to arbitration have lower on-field performance? Not that we can observe. There are no statistically significant differences in on-field performance between players who go to arbitration and those who settle voluntarily. This might be due to longer-term career concerns. Most arbitration-eligible players are early in their careers and their on-field performance is visible to other clubs. So they have incentives to set aside any residual feelings from the dispute-resolution process and to perform at a high level in order to position themselves for a lucrative, subsequent contract.

We are unable to observe the exact reasons underlying these results. It might be the case that financial concerns cause teams to trade or release players who win in arbitration, but it is harder to see how a purely financial reason would explain the result that the relationship is also less durable when the player loses and the club has to pay a lower salary. Rather, the pattern of results is consistent with scenarios in which the arbitration process harms the player-club relationship and negatively affects player behaviors that are hard to observe (e.g., clubhouse attitude, loyalty to the team), but career concerns and/or loyalty to teammates and fans causes a player to continue to publicly perform at his usual level. Such a scenario can be generalized into an hypothesis that could be applied to other settings—that is, the effect of a dispute resolution procedure will be smaller on dimensions of performance that are valued and easily observed by potential, future partners and larger where performance is harder for future potential partners to observe.

While the data come from the context of professional baseball, these results are important for dispute resolution researchers and practitioners with implications beyond professional baseball. The claimed superiority of voluntary dispute resolution procedures is neither uniformly rejected nor supported. Additional research and perhaps some re-thinking of longstanding assumptions are therefore needed.

Source: John W. Budd, Aaron J. Sojourner, and Jaewoo Jung (forthcoming) “Are Voluntary Agreements Better? Evidence from Baseball Arbitration,” Industrial and Labor Relations Review. Here is the full paper.

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