Litigation and Settlement Under Loss Aversion

28 Pages Posted: 19 Mar 2020

See all articles by Cédric Argenton

Cédric Argenton

Tilburg Law and Economics Center (TILEC); Tilburg University - Tilburg University School of Economics and Management

Xiaoyu Wang

Tilburg Law and Economics Center (TILEC); Tilburg University

Date Written: January 30, 2020

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

Suggested Citation

Argenton, Cédric and Wang, Xiaoyu, Litigation and Settlement Under Loss Aversion (January 30, 2020). TILEC Discussion Paper No. DP2020-002, Available at SSRN: https://ssrn.com/abstract=3556480 or http://dx.doi.org/10.2139/ssrn.3556480

Cédric Argenton (Contact Author)

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Xiaoyu Wang

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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