New Empirical Tests for Classic Litigation Selection Models: Evidence from a Low Settlement Environment

Abstract

AbstractLaw and economics theorists have long advanced theories of litigation and settlement, including the canonical Landes–Posner–Gould (LPG) and Priest and Klein (PK) models. Famously, PK predict that, as settlement rates rise, plaintiff win rates approach 50%. So far, though, empirical testing of these models has been hampered by two major limitations: first, these models make clear predictions about the effect of case stakes on settlement rates and plaintiff win rates, but lack of reliable data on stakes means these predictions have gone untested. Second, most of the studies have used data from the United States, a high-settlement, high-litigation-costs setting, and the generalizability of these models to other institutional settings has been less explored. We use a novel data set of Taiwanese court data to test previously untested predictions of the LPG and PK models and explore the extent to which these models apply to a low-settlement, low-litigation-cost setting. We find strong support for the predictions of the LPG model that we test but at best weak support for the 50% hypothesis of the PK model, consistent with recent research suggesting that the hypothesis will have limited applicability in a low-settlement, low-litigation-cost environment. These results suggest directions for research and provide guidance to policy on the role that stakes play in the filing and settlement of claims.