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Litigation and settlement under loss aversion

Author

Listed:
  • Cédric Argenton

    (Tilburg University)

  • Xiaoyu Wang

    (Shandong University)

Abstract

In this paper, we investigate how loss aversion affects people’s behavior in private litigation. We find that a loss-averse plaintiff demands a higher settlement for intermediate claims to maintain her threat to proceed to trial following rejection 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.

Suggested Citation

  • Cédric Argenton & Xiaoyu Wang, 2023. "Litigation and settlement under loss aversion," European Journal of Law and Economics, Springer, vol. 56(2), pages 369-402, October.
    • Handle: RePEc:kap:ejlwec:v:56:y:2023:i:2:d:10.1007_s10657-023-09777-6
    DOI: 10.1007/s10657-023-09777-6
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    More about this item

    Keywords

    Settlement; Loss aversion; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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