Gambling for the Upper Hand –Settlement Negotiations in the Lab

We exploit a controlled frameless laboratory experiment to study settlement negoti-ations and the plainti¤’s decision to raise a lawsuit in case of an impasse. We …nd thatgreater variance in court outcomes increases the litigation rate and lowers the settlementrate. This latter …nding goes against the received wisdom and earlier experimental ev-idence (Ashenfelter et al. 1992) that greater risk in arbitration outcomes increases thesettlement rate. We …nd that self-serving biases about the protagonist’s course of actionare accountable for the lower settlement rate, while an impasse payo¤ inferior to that ofthe defendant induces the plainti¤s to excessive risk-taking in an attempt to narrow thegap.