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Optimism and pessimism in bargaining and contests

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  • Yang, Erya

Abstract

This paper uses the rank-dependent expected utility (RDEU) model to capture the effects of optimism and pessimism on the choice between a pre-trial settlement and a trial (or more generally, between a private settlement and a litigation). These two legal procedures are described as a bargaining game and a contest game, respectively. My models predict that a contest occurs if the aggregate optimism premium in a contest (AOPC) is sufficiently high. I also find that the AOPC tends to be higher for close cases. Such predictions are consistent with the Priest-Klein empirical observation that a plaintiff's winning probability is often near 50% in many areas of civil litigation. I also show that the highest levels of effort in both a bargaining game and a contest game are exerted when one is moderately optimistic. However, excessive optimism will reduce one's effort level, and hence, one's winning rate. As a result, when faced with an excessively optimistic party, a risk-neutral party may prefer a contest over bargaining.

Suggested Citation

  • Yang, Erya, 2020. "Optimism and pessimism in bargaining and contests," International Review of Law and Economics, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:irlaec:v:64:y:2020:i:c:s0144818820301484
    DOI: 10.1016/j.irle.2020.105935
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    References listed on IDEAS

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    2. Kyung nok Chun & Zachary Schaller & Stergios Skaperdas, 2020. "Why Are There Strikes?," Revue d'économie politique, Dalloz, vol. 130(6), pages 929-956.

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    More about this item

    Keywords

    Rank-dependent expected utility; Optimism; Conflict; Contest; Bargaining; Litigation; Priest-Klein hypothesis;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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