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Litigation and Settlement under Loss Aversion

Author

Listed:
  • Argenton, Cedric

    (Tilburg University, TILEC)

  • Wang, Xiaoyu

    (Tilburg University, TILEC)

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.
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Suggested Citation

  • Argenton, Cedric & Wang, Xiaoyu, 2020. "Litigation and Settlement under Loss Aversion," Discussion Paper 2020-002, Tilburg University, Tilburg Law and Economic Center.
    • Handle: RePEc:tiu:tiutil:3a267c4a-2f7d-41c9-966b-efc7d23d0894
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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
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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