1. University of Pennsylvania, U.S.A
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    1. Queen Mary, University of London, U.K.
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    • We thank Jan Eckhout and two anonymous referees for comments and suggestions that greatly improved the article. We are also grateful to Ethem Akyol, Attila Ambrus, Mark Amstrong, Vincent Crawford, Peter Esö, Christian Hellwig, Johannes Hörner, Navin Kartik, Daniel Krähmer, Vijay Krishna, Stephan Lauermann, Gilat Levy, Ming Li, David Martimort, Rony Razin, Larry Samuelson, and Satoru Takahashi for helpful comments. Please address correspondence to: Andriy Zapechelnyuk, School of Economics and Finance, Queen Mary, University of London, Mile End Road, London E1 4NS, U.K. Phone: +44 (0) 207 8823997. E-mail: a.zapechelnyuk@qmul.ac.uk


We study common arbitration rules for disputes of two privately informed parties, final offer and conventional arbitration. Conventional arbitration is shown to be an optimal arbitration rule in environments with transferable utility, while final offer arbitration is optimal if utility is nontransferable and the parties’ interests are not too aligned. These results explain the prevalence of both arbitration rules in practice.