Arbitration versus Settlement

19 Pages Posted: 21 Feb 2007


Incomplete contracts and laws often lead to disputes. Before a dispute arises, parties can adopt an arbitration clause. If they choose to do so, future disputes are resolved before an arbiter. Otherwise, parties will choose between settlement and litigation after a dispute has risen. We analyze variables that might dictate the parties' choices: the uncertainty of the case, the merit of the case, the costs of litigation, the probability of a dispute, and the amount at stake. Our results contrast with existing literature, which does not distinguish between contracts, where arbitration clauses are feasible, and torts, where they are not feasible. For example, we find that policies that reduce litigation in torts, such as a litigation tax, might increase litigation in contracts. Finally, we note that arbitration clauses are akin to making a contract more complete ex ante, while settlement amounts to renegotiating a contract ex post. Using this framework, we derive implications for theories of litigation and incomplete contracts.

Keywords: arbitration, settlement, litigation, tort, contract

JEL Classification: K12, K41

Suggested Citation

Dari-Mattiacci, Giuseppe, Arbitration versus Settlement. Revue Economique, Forthcoming, Amsterdam Center for Law & Economics Working Paper No. 2007-02, Available at SSRN:

Giuseppe Dari-Mattiacci (Contact Author)

University of Amsterdam ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

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