The impact of award uncertainty on settlement negotiations

Eric Cardella, Carl Kitchens

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

Legal disputes are often negotiated under the backdrop of an adjudicated award. While settlements are common, they are not universal. In this paper, we empirically explore how uncertainty in adjudicated awards impacts settlement negotiations. To do so, we develop an experimental design to test how increases in variance and positive skewness of the award distribution impact negotiations and settlement rates. We find increases in variance decrease settlement rates, while increases in skewness generally increases settlement rates. We also gather individual measures of risk aversion and prudence, and incorporate these measures into the analysis to test for heterogeneous treatment effects. Overall, our results suggest that highly variable adjudicated awards can contribute to the excess use of inefficient litigation, while more positively skewed awards can reduce the use of inefficient litigation.

Original languageEnglish
Pages (from-to)333-367
Number of pages35
JournalExperimental Economics
Volume20
Issue number2
DOIs
StatePublished - Jun 1 2017

Keywords

  • Bargaining
  • Prudence
  • Settlement negotiations
  • Uncertainty

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