Trial and Settlement under Cumulative Prospect Theory
نویسندگان
چکیده
It is well-known that if the parties in a legal dispute agree about the likelihood of potential trial outcomes then they will be inclined to settle vs. going to trial in order to reduce litigation costs and risk. In this paper, we assume that both plaintiff and defendant evaluate this decision in accordance with Cumulative Prospect Theory. It is found that the two parties will sometimes be unable to reach settlement, instead preferring to incur litigation costs for the opportunity to minimize their losses by prevailing at trial. We derive and characterize the conditions under which settlement is Pareto efficient vs. going to trial.
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