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

• Published date: 01 December 2024
• Author: Yun‐chien Chang,David Ta‐wei Hung,Chang‐Ching Lin,Joseph Tao‐yi Wang
• Date: 01 December 2024
• DOI: http://doi.org/10.1111/jels.12397

ORIGINAL ARTICLE

Emotional bargaining after litigation: An experimental

study of the Coase theorem

Yun-chien Chang

1

| David Ta-wei Hung

2

|

Chang-Ching Lin

3

| Joseph Tao-yi Wang

4

1

Jack G. Clarke Professor in East Asian Law & Director of East Asian Program, Cornell Law School, Ithaca,

New York, USA

2

MobLab Inc., Pasadena, Carlifornia, USA

3

Department of Economics, National Cheng Kung University, Tainan, Taiwan

4

Department of Economics, National Taiwan University, Taipei, Taiwan

Correspondence

Yun-chien Chang, Jack G. Clarke Professor in East Asian Law & Director of East Asian Program, Cornell Law

School, 310 Myron Taylor Hall, Ithaca, NY 14853, USA.

Email: ycchang@cornell.edu

Funding information

The Ministry of Science and Technology, Grant/Award Numbers: MOST 105-2410-H-001-024,

MOST106-2628-H-002-001-MY4; Taiwan Social Resilience Research Center, Grant/Award Number:

NTU113L900303; National Science and Technology Council of Taiwan, Grant/Award Number: NSTC

113-2628-H-002-001

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 dur-

ing 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 dif-

ference 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.

A draft of this paper has been presented at 2023 CELS, 2023 ALEA, 2023 AsLEA, 2022 CELS in Asia held at

Institutum Iurisprudentiae, Academia Sinica, Taiwan, Law and Economics Workshop at NYU School of Law,

Law and Economics Workshop at the University of Texas at Austin School of Law, the 5th International

Conference on Empirical Legal Studies of Judicial Systems held in Taipei, and the Asian Law and Society

Association Annual Meeting in Osaka.

DOI: 10.1111/jels.12397

©2024 Cornell Law School and Wiley Periodicals LLC.

786 J Empir Leg Stud. 2024;21:786–825.

wileyonlinelibrary.com/journal/jels

KEYWORDS

animosity, trespass, unstructured bargaining game with one-sided private information, virtual

reality (VR)

INTRODUCTION

This experimental study explores to what extent animosity arising from litiga-

tion influences litigants’negotiations regarding the entitlement in question. In

the legal literature, Farnsworth (1999) contends that animosity created in litiga-

tion hinders post-litigation bargaining.

1

If this is generally true, it has implica-

tions for the Coase theorem, derived from Coase (1960). The Coase theorem

states that “when transaction costs are zero, an efficient use of resources results

from private bargaining, regardless of the legal assignment of property rights”

(Cooter & Ulen, 2012, p. 85). That is, when transaction cost is sufficiently low,

even if entitlement is allocated inefficiently, this can be redressed by post-

litigation bargaining. If litigation—the quintessential entitlement-(re)allocating

mechanism—creates animosity, and animosity precludes negotiation after litiga-

tion, then it becomes important for courts to achieve allocative efficiency by for-

mulating the correct doctrine, or at least reach an efficient decision in the case

(Cooter & Ulen, 2012, pp. 85–87; Shavell, 2004, pp. 107–108),

2

as efficiency will

be otherwise infeasible. While several experimental works have tested the foun-

dation of the Coase theorem (Aivazian et al., 2009; Bar-Gill & Engel, 2016;

Coursey et al., 1987; Hoffman & Spitzer, 1982,1986), and the psychology litera-

ture (e.g., Andrade & Ariely, 2009) has looked into the role of emotion in

bargaining, our study is the first lab experiment examining the role of animosity

in bargaining over uses of resources immediately after entitlements are assigned;

in addition, our experimental designs elicit animosity in a different way from

that of other economic or psychological experiments that also involve negative

emotions such as anger, so that our lab environment is closer to (albeit far from

a replica of) a real-world litigatio n setting.

Farnsworth (1999) and an extensive line of following articles do not clearly

spell out the mechanism which makes litigation a deal breaker. That is, what

part of litigation creates animosity? Does being sued, in itself, create animosity?

Does being cross-examined by the other party in person create animosity?

1

Farnsworth (1999) has been cited more than 300 times in Google Scholar. Many of these citations are by leading

scholars, such as Sunstein (1999, p. 117), Ayres and Goldbart (2001, p. 71), Posner (2001, p. 2007), Posner and

Weyl, 2017, p. 57, Eisenberg and Miller (2015, p. 34), Fennell (2005), and Smith (2004, p. 1044). This count does

not include citations of the same Farnsworth article that was included in Sunstein (2000) as a chapter. For

assessments of the overall impact of Farnsworth (1999), see Chang and Lin (2024).

2

There is evidence that judges tend to avoid ex post inefficiency but not ex ante inefficiency (Chang, 2019). If this

is generally true, allocative inefficiency may be pervasive.

EMOTIONAL BARGAINING AFTER LITIGATION 787

(If this is the case, deal rates after pro se litigation, but not represented litigation,

should be lower.) Perhaps losing creates anger, and winning after a hard fight

also creates enmity. Alternatively, perhaps it is not animosity but the endow-

ment effect that hinders post-litigation bargaining. Farnsworth (1999, p. 394)

does not accept this explanation, but the literature picks it up anyway.

3

Without

a clear idea of the operative mechanism, it is hard to test the theory. In this

study, therefore, we set aside the issue of what aspect of litigation causes ani-

mosity. Instead, our experiment focuses on the narrow, testable question of

whether animosity created in litigation (framed by vignettes) reduces the fre-

quency of successful bargaining (measured by deal rates in economic bargaining

games). More specifically, for ecological validity purposes, our vignettes frame

experimental subjects as litigants in eviction litigation—half as trespassers who

lost the lawsuit, and half as landowners who won and must consider whether to

accept trespassers’offers of rent to allow for their continued use of the land. If

the Farnsworth thesis is correct, and our emotional stimulus is highly effective,

the deal rate should be close to zero in the treatment groups—or at least the deal

rates in the treatment groups should be lower than those in the control group. If

the deal rate differences are not statistically significant, either the corollary to

the Coase theorem can safely ignore animosity, or our emotional stimulus is not

sufficiently effective.

We employed a between-subject experimental design to tease out whether

animosity stands in the way of profitable, efficiency-enhancing trades. All sub-

jects play bargaining games designed by Camerer et al. (2019), and whether a

successful deal is reached in each game is recorded. To answer our research

questions, we expose subjects to four experimental conditions, with varying

degrees of lab-stimulated animosity. Our experimental design is summarized in

Table 1.

More specifically, subjects are randomly assigned to either the role of

trespassed landowners (“landowners”), or of trespassing building owners (“tres-

passers”). Subjects in the control group (hereinafter Control) are only briefed on

the background facts of the scenario, on trespass and eviction lawsuits, and noti-

fied of a court decision in favor of landowners. Subjects in the light treatment

group (hereinafter Light) also interact with videos in the hope of stimulating ani-

mosity against subjects who play a different role. In the strong VR treatment

group (hereinafter Strong), all subjects wear virtual reality (VR) devices so that

the magnitude of our stimulus increases.

4

In addition, subjects do slider tasks in

which participants in the trespasser role, who loses the litigation, can create a

competitive disadvantage for participants in the landowner role, who wins the

3

See Jolls et al. (1998, pp. 1499–1500); Korobkin (2003, pp. 1291–1292); Nicita and Rizzolli (2006, p. 108);

Lewinsohn-Zamir (2006a, p. 25); Ulen (2013, p. 25); Becher and Zarsky (2011).

4

See Cornet and Van Gelder (2020) and Cornet and van Gelder (2021) regarding the use of VR in experiments.

788 EMOTIONAL BARGAINING AFTER LITIGATION