Cary Deck, associate professor of economics in the Sam M. Walton College of Business, replies:
Arbitration and mediation are two forms of “alternative dispute resolution” (ADR). These are alternatives to the traditional judicial system. The distinction between the two forms of ADR is the ability of a typically neutral third party to enforce a settlement. In mediation, the mediator tries to help the disputants reach a mutually agreeable outcome by suggesting possible compromises, identifying offsetting concessions, etc. However, a mediator cannot force a settlement and therefore the process may not lead to a resolution in which case the parties can turn to the traditional legal system, binding arbitration, or some other form of ADR. In arbitration, the arbitrator (or the panel of arbitrators) has the ability to enforce an outcome and courts have held that the arbitrator’s decision is legally binding. People typically think of labor disputes being settled via arbitration, but due to restrictions on discovery, testimony, duration, and privacy, arbitration can generate substantial cost savings and is increasingly being used in non-labor contexts. The fine print of many consumer contracts from airline tickets to computer purchases states that disputes will be resolved via arbitration. There are several forms of arbitration. The most common form is conventional arbitration where the arbitrator is free to impose any outcome. The next most publicized form is final offer arbitration (FOA) due to its use by Major League Baseball. In FOA each side makes a proposal and the arbitrator must impose one of the proposals.