Litigation and Settlement under Loss Aversion

Cedric Argenton, Xiaoyu Wang

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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 loss- neutral 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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages28
Volume2020-008
Publication statusPublished - 24 Mar 2020

Publication series

NameCentER Discussion Paper
Volume2020-008

Keywords

  • settlement
  • loss aversion
  • Asymmetric Information

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  • Cite this

    Argenton, C., & Wang, X. (2020). Litigation and Settlement under Loss Aversion. (CentER Discussion Paper; Vol. 2020-008). CentER, Center for Economic Research.