Arbitration Effect

Arbitration is changing the United States justice system. Critics argue that arbitration leads to claim suppression. Proponents argue that, compared with courts, arbitration is cheaper and less formal. These claims have not been empirically tested. In particular, whether and how arbitration impacts individuals’ decision to sue remains an open inquiry. This article for the first time shows, in a series of experiments, the impact of arbitration agreements on individuals' decisions to sue. This article calls it the “arbitration effect.” First, we test whether the arbitration effect exists; that is, if arbitration agreements negatively impact individuals' decision to sue. Second, we experimentally test individuals' decisions to opt out of arbitration agreements. Lastly, we assess whether any type of information can “cure” the arbitration effect. The results establish that individuals are less likely to sue in arbitration as opposed to court, hence the arbitration effect. Such an effect, however, does not exist at the contracting stage, meaning that individuals do not shun arbitration when given the option. Further, none of the fundamental attributes of arbitration, as touted by the U.S. Supreme Court, nor win-rates and class actions mitigate the arbitration effect. Equally, informational nudges do not reduce the effect, and individuals do not ascribe negative attributes to firms forcing mandatory arbitration. For decades, courts and lawmakers grappled with issues related to arbitration. The article provides much-needed data on arbitration. Findings cast serious doubts on the ongoing efforts—market-based, judicial, or regulatory—aiming to change the arbitration course.