Who Wins in Settlement Negotiations?

Abstract

When lawsuits are resolved out of court, what determines the settlement amount?

As a first approximation, the legal merits of the lawsuit matter, of course. Settlements are negotiated in the shadow of the law. But there is much more to settlement negotiations than the facts of the dispute and the relevant legal rules. Within certain boundaries determined by the nature and strength of the plaintiff's claim, the plaintiff's lawyer attempts to obtain every dollar that the defendant will pay, and the defendant's lawyer attempts to avoid paying all but the most minimal amount. This article uses a bargaining experiment to attempt to identify the factors that can be assessed prior to the beginning of bargaining that determines who wins and who loses this battle.

The analysis reveals that, in the conditions of the simulated negotiation, the negotiators' estimate of the opposing negotiator's reservation price is the best predictor of outcomes, follow by the gender of the negotiator and the size of the first offer made. The negotiator's target or aspiration, the negotiator's relative enthusiasm for litigating the case if need be, and the negotiator's relative confidence in his negotiating ability were also predictive of a successful outcome, although less important. The negotiators' pre-negotiation perception of what would constitute a fair outcome had a very small indirect effect on outcomes. Together these seven variables explain more than half of the variation in settlement outcomes achieved by the subjects who participated in the simulation.

The specific context of this article is settlement bargaining, but the insights generates are applicable to any two-party negotiation. Thus, the results should be of interest not only to litigators and legal scholars, but to anyone who negotiates as part of his or her personal or professional life or studies negotiation in any context.

Keywords: negotiation, settlement, bargaining, experimental