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Litigation and settlement under loss aversion

Argenton,Cedric
; 
Wang,Xiaoyu
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.
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Publisher Copyright: © 2023, The Author(s).
Date
2023-10
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Tilburg University Research Output Collection
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Keywords
settlement, loss aversion, asymmetric information, D82 - Asymmetric and Private Information ; Mechanism Design
Citation
Argenton, C & Wang, X 2023, 'Litigation and settlement under loss aversion', European Journal of Law and Economics, vol. 56, no. 2, pp. 369-402. https://doi.org/10.1007/s10657-023-09777-6
URI
https://hdl.handle.net/20.500.14602/79706
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