Do Parties Negotiate After Trespass Litigation? An Empirical Study of Coasean Bargaining

Abstract

The allocative efficiency outcome predicted by the Coase theorem critically depends on the assumption that, barring high transaction costs, parties will bargain after litigation and mis-allocated entitlements by courts will be re-allocated through voluntary exchanges. Ward Farnsworth’s 1999 informal small-scale survey lent credence to the claim that parties do not bargain after litigation because of the endowment effect and the animosity created by litigation. Farnsworth’s sample is small and statistically biased. Yet no other article has tested whether parties in the real world would systematically fail to exchange for behavioral reasons.
This paper combines six different data sources to shed light on this issue. We survey nearly 800 practicing attorneys, who reported that a majority of their clients settled with the other litigating party after courts had rendered decisions. We also examine over 300 hand-coded Taiwanese cases in which the landowner sued the illicit possessor for building a structure on the plaintiff’s property. Real estate transaction records of the land in dispute show that in 6% of the cases, the landowner registered a sale of property to the possessor after the litigation. Evidence from Google Street View and satellite pictures taken by the Taiwan government suggests that the exchange rate is higher than 6%. Logistic regressions suggest that post-litigation bargaining dynamics are at least partly rational — allocative efficiency and transaction costs (conventionally defined) still matter. To the extent that the pro se status proxies for animosity incurred during litigation, Farnsworth’s thesis is also supported.

Keywords: Endowment effect (endowment theory), animosity, the Coase theorem, eviction, behavioral law and economics

JEL Classification: K11