An Empirical Investigation of Settlement and Litigation—The Case of Taiwanese Labor Disputes

Using newly collected data on labor disputes in Taiwan, we study the characteristics of cases settled out of court, cases dropped after settlement fails, and cases actually brought to court. We find that the size of the stakes plays a crucial role in routing between settlement and litigation. In particular, our study shows that increasing stakes decreases the probability of settlement, decreases the percent of the claim recovered in settlement, and increases the probability of litigation after settlement fails. Moreover, while the plaintiff's credibility of threatening a lawsuit is an important factor, its absence is not so important as to undermine the pattern that an increase in the stakes would decrease the likelihood of settlement. Our study also reveals that the mediation mechanism performs the function of allowing workers with small claims to obtain effective recovery, which would be impossible if those workers had to resort to litigation. This result also suggests that the traditional game‐theoretic models are inadequate in explaining the litigants' behavior in settlement of small claims. Finally, we find that the workers' risk aversion might cause the percent of the claim recovered in settlement to drop as the amount of their initial claim increases.