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Settlement Negotiations with Reference-dependent Preferences
[Reference Points and Effort Provision]

Author

Listed:
  • Christoph Rössler
  • Tim Friehe

Abstract

This article analyzes pretrial bargaining between litigants with reference-dependent preferences. We build on Bebchuk (1984, “Litigation and Settlement under Imperfect Information,” 15 Rand Journal of Economics 404–15) and, motivated by empirical evidence, assume that the referent is based on expectations. We find that reference dependence on behalf of plaintiffs increases the settlement probability. The fact that preferences are reference-dependent meaningfully influences comparative statics predictions. In our extensions, we discuss the role of fee shifting, the effect of having the referent based on the status quo instead of on expectations, and risk aversion.

Suggested Citation

  • Christoph Rössler & Tim Friehe, 2022. "Settlement Negotiations with Reference-dependent Preferences [Reference Points and Effort Provision]," American Law and Economics Review, American Law and Economics Association, vol. 24(1), pages 171-202.
    • Handle: RePEc:oup:amlawe:v:24:y:2022:i:1:p:171-202.
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    File URL: http://hdl.handle.net/10.1093/aler/ahab015
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    Cited by:

    1. Hylton, Keith N., 2023. "Mutual optimism and risk preferences in litigation," International Review of Law and Economics, Elsevier, vol. 75(C).

    More about this item

    Keywords

    D81; K41;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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