In this paper we study the complete evolution of a final-offer arbitration system used in New Jersey with data we have systematically collected over the 18-year life of the program. Covering the wages of police officers and firefighters, this system provides virtually a laboratory setting for the study of strategic interaction. Our empirical analysis provides convincing evidence that, left alone, the parties do not construct and present their offers as successfully as when they retain expert

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... nts to assist them. In principle, expert agents may be helpful to the parties for two different reasons: (a) they may move the arbitrator to favor their position independently of the facts, or (b) they may help eliminate inefficiencies in the conduct of strategic behavior. In this paper we construct a model where the agent may influence outcomes independent of the facts, but where the agent may also improve the outcomes of the process by moderating any self-serving biases or over-confidence that may have led to impasse in the first instance. Our data indicate that expert agents may well have had an important role in moderating self-serving biases early in the history of the system, but that the parties have slowly evolved to a non-cooperative equilibrium where the use of third-party agents has become nearly universal and where agents are used primarily to move the fact finder's decisions. I. Introduction Rational arrangements to resolve unproductive disputes are a key determinant of how well a modern economy operates. 1 Yet few empirical studies of field data, designed to test the functioning of these systems, currently exist. In this paper we study the complete evolution of a final-offer arbitration system used in New Jersey with data we have systematically collected over the 18-year life of the program. Covering the wages of police officers and firefighters, this system was designed by an economist and provides virtually a laboratory setting for the study of the evolution of strategic interaction. 2 It also provides us with an opportunity to characterize with publicly available data an arbitration system for resolving disputes. The use of arbitration systems has grown steadily for the resolution of disputes involving divorce and child custody, securities regulation, international business disputes, and labor contracts (including the setting of major league baseball salaries), and the design of these systems is still in its infancy. We use these data both to provide a stylized description of the basic operating characteristics of the system and to test and estimate a theoretical model of bargainers' behavior and the role of third parties (who are typically lawyers) in that behavior. Our empirical analysis provides convincing evidence that, left alone, the parties do not construct and present their offers as successfully as when they retain expert agents to assist them. Apparently, even in this relatively simple bargaining environment, the parties derive considerable benefits from expert assistance. In principle, expert agents may be helpful to the parties for two different reasons: (a) they may move the arbitrator to favor their position independently of the facts, or (b) they may help eliminate inefficiencies in the conduct of strategic behavior. In the former case, the parties encounter what are the equivalent of prisoners' dilemma incentives: despite their cost and the zero sum nature of the game, each party will have an incentive to hire an agent regardless of what the other party does. In the latter case, however, the parties receive benefits that lead to higher quality arbitrated outcomes. 3 In this paper we construct a model that permits us to test and estimate the influence of the agent's role in the arbitration process. We do this in a model where the agent may influence outcomes independent of the facts, but where the agent may also improve the outcomes of the process by moderating any self-serving biases or over-confidence that may have led to the impasse in the first instance. We thus characterize empirically the role of expert agents as possible moderators of self-serving biases and test for the