Some Thoughts About the Economics of Settlement

Abstract:     
Proponents of settlement assume that more trials would crush the civil justice system under the weight of the cost and time that those trials entail. However, trials may decrease the total amount of litigation by clarifying legal principles and, thus, making it easier for potential tortfeasors to understand and comply with the law. Something that diminishes law-breaking and thereby also reduces total societal litigation costs would have much to commend it. Empirical investigation is thus merited to determine whether settlements actually increase society’s total litigation costs by short-circuiting the opportunity for a trial to produce clarifying rules that would make future litigation less likely. Based on the results, it is possible that the traditional economic view of trial should be reversed in certain respects.

Moreover, the benefits of trial and costs of settlement may not be captured fully by pecuniary assessments. The psychological findings that have emerged in the past twenty-five years indicate how important fairness is to people. This desire for fairness affects individual decision-making in litigation, as well as the perceptions (of participants and the public alike) of the legitimacy and value of the civil justice system. Pro-settlement rules or activities could thus potentially create harm by pressuring litigants to cut short their participation in the system and their pursuit of an impartial adjudication.

Number of Pages in PDF File: 14

Keywords: Settlement, litigation costs, benefits of trial, costs of litigation, fairness and decisionmaking

JEL Classification: K10, K41

Accepted Paper Series