Psychology, Economics, and Settlement: A New Look at the Role of the Lawyer

Abstract

Law and economics models of litigation settlement, based on the behavioral assumptions of rational choice theory, ignore the many psychological reasons that settlement negotiations can fail, yet they accurately predict that vast majority of lawsuits will settle short of formal adjudication. What explains this?We present experimental data that suggests lawyers might evaluate the settlement vs. adjudication decision from a perspective more closely akin to "rational choice theory" than will non-lawyers and, consequently, increase the observed level of settlement. We then evaluate whether the hypothesized difference between lawyers and non-lawyers is likely to lead to more efficient dispute resolution, concluding that lawyers are efficiency enhancing when differences between lawyers and non-lawyers can be attributed to "cognitive error" on the part of the latter but not when those differences are due to differences in preference structures and litigation goals. Finally, we suggest a framework that lawyers concerned with efficient dispute resolution should adhere to when counseling clients during settlement negotiations.

JEL Classification: D74, K41