Litigation and Settlement Under Loss Aversion
28 Pages Posted: 19 Mar 2020
Date Written: January 30, 2020
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
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