Litigation and Settlement Under Loss Aversion

Abstract

In this paper, we investigate how loss aversion affects people's behavior in civil litigation. We find that a loss-averse plaintiff demands a higher offer for small claims to maintain her threat to proceed to trial compared to a lossneutral plaintiff. For larger claims, a loss-averse plaintiff demands a lower offer to increase the settlement probability as loss pains her extra in trial. We also investigate how various policies affect loss-averse litigants' settlement decisions. Only a reduction in the asymmetry of information about trial odds uniformly leads to higher settlement rates.

Keywords: settlement, loss aversion, asymmetric information

JEL Classification: D82, K41