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The impact of award uncertainty on settlement negotiations

Published online by Cambridge University Press:  14 March 2025

Eric Cardella  and
Carl Kitchens
Eric Cardella*
Affiliation:
Rawls College of Business, Texas Tech University, 79409 Lubbock, TX, USA
Carl Kitchens*
Affiliation:
Department of Economics, Florida State University, 239 Bellamy Building, 32306 Tallahassee, FL, USA
*
eric.cardella@ttu.edu
ckitchens@fsu.edu
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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.

Keywords

PrudenceSettlement negotiationsBargainingUncertainty

JEL classification

K40: General C91: Laboratory, Individual Behavior K10: General C70: General
Type
Original Paper
Information
Experimental Economics , Volume 20 , Issue 2 , June 2017 , pp. 333 - 367
Copyright
Copyright © 2016 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-016-9486-z) contains supplementary material, which is available to authorized users.

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