This chapter begins with a brief overview of the standard economic analysis of litigation and settlement. It then analyzes a series of behavioral impediments to settlement. These include self-serving biases, overoptimism, non-pecuniary motivations, biases stemming from the adversarial nature of litigation, reference-dependence in assessing settlement offers, and the framing of litigation outcomes. The chapter then points to two behavioral phenomena—regret avoidance and loss aversion—that strongly encourage settlements. The chapter looks at behavioral explanations for the relatively limited use of alternative dispute resolution mechanisms. It also takes a closer look at the role of lawyers and client-lawyer relationships. Finally, it highlights the behavioral contribution to the understanding of plea bargaining in criminal proceedings.
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