Emotional bargaining after litigation: An experimental study of the Coase theorem

Abstract

Entitlement assignment is unimportant if transaction cost is sufficiently low, as post-litigation bargaining can redress allocative inefficiency, or so goes the Coase theorem. Ward Farnsworth, based on interviews with lawyers, argues that animosity created during litigation, a key mechanism to (re)allocate entitlement, will hinder the conclusion of any deal following litigation. Using a laboratory experiment, we test whether animosity generated before negotiations reduce the rate at which deals are successfully concluded and find evidence for a lower deal rate under one of the treatment conditions (the raw difference being three percentage points). The small practical effect may be attributed to rationality carrying the day and/or the limited degree of animosity we can generated in the lab with human subjects. The Coase theorem holds, while Farsworth's observation should not be ignored.