The Role of Judicial Discretion in Dispute Settlement

Abstract

We consider two common modes of judicial resolution: judicial discretion, where the judge or jury has broad discretion in fashioning a remedy, and winner take all where the remedy is pre-determined by the governing substantive law. We analyze these systems in light of the fact that pre-trial bargainers have been shown to have excessive confidence in their own positions. We find theoretically that winner-take-all rules magnify the effects of over-confidence and diminish the likelihood of settling relative to judicial discretion. We confirm our model with a laboratory experiment showing significantly fewer pre-trial agreements under winner-take-all. These results imply that increasing judicial discretion in fashioning remedies could increase pre-trial agreements and promote efficiency. This has implications for many areas of law, including donative transfers, property law, patent infringements, and agreements on liquidated damages.