Arbitration Effect

67 Pages Posted: 26 Jan 2022 Last revised: 21 Jul 2022

See all articles by Farshad Ghodoosi

Farshad Ghodoosi

California State University, Northridge, Nazarian School of Business & Economics,

Monica Sharif

California State University, Los Angeles

Date Written: January 20, 2022

Abstract

Arbitration is changing American law and its justice system. Critics argue that arbitration leads to claim suppression. Proponents contend that it is cheaper and less formal. These claims, particularly claim suppression, have not been empirically tested. Whether and how arbitration impacts individuals’ decision to sue remains an open inquiry. In a series of experiments, this Article for the time shows the impact of arbitration agreements on individuals’ decision to sue. This Article calls it the "Arbitration Effect."

First, this Article tests whether the arbitration effect exists; that is if arbitration agreements negatively impact individuals’ decision to sue. Second, the Article experimentally tests individuals’ decision to opt out of arbitration agreements. Lastly, the Article assesses whether any type of information can ‘cure’ the arbitration effect.

The empirical results establish that individuals are less likely to sue in arbitration as opposed to court, hence the arbitration effect. Such effect, however, does not exist at the contracting stage meaning that individuals do not shun away from arbitration when given the option. Further, none of the fundamental attributes of arbitration, as touted by the U.S. Supreme Court, are what individuals care about. Nor do win-rates and class action mitigate the arbitration effect. Equally, informational nudges do not reduce the effect and individuals do not ascribe negative attributes to firms forcing mandatory arbitration.

For decades, courts and lawmakers grappled with issues related to arbitration, which resulted in a myriad of Supreme Court decisions, several bills sitting on Capitol Hill, and continuous circuit splits on various issues. The Article provides much-needed data that can help clarify some of these issues most notably arbitration’s effect on individuals’ decision to sue.

Findings cast serious doubts on the ongoing efforts—market-based, judicial, or regulatory—aiming to change the arbitration course. It further shows that the individuals’ contracting decision differs from their justice decision, an important distinction for courts and lawmakers to note in their approaches to right to sue, unconscionability, and vindication of statutory rights.

Keywords: Arbitration, Contracts, Decision to Sue, Decision to Contract, Access to Justice, Behavioral Arbitration, Fairness in Arbitration

Suggested Citation

Ghodoosi, Farshad and Sharif, Monica, Arbitration Effect (January 20, 2022). Available at SSRN: https://ssrn.com/abstract=4010102 or http://dx.doi.org/10.2139/ssrn.4010102

Farshad Ghodoosi (Contact Author)

California State University, Northridge, Nazarian School of Business & Economics, ( email )

18111 Nordhoff St
Northridge, CA 91330
United States

Monica Sharif

California State University, Los Angeles ( email )

United States

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