Settlements v. Judgments: A Prospect Theory Analysis

Abstract

When the Rational Choice model reveals itself insufficient to explain why parties in judicialized Labor disputes in the Provincia de Buenos Aires prefer to settle over waiting for a final decision, the Prospect Theory provides a sound explanation: as Labor Law and Procedural Rules become applicable, they produce a visible cost-shift to the employer, so parties expect judges to decide in favor of the workers. In this scenario, the employer’s perception of what is to be considered a cost and a benefit become altered, incentivizing her risk-aversion and leading her to bargain settlements that she wouldn’t even consider otherwise.

JEL CODE: J23, J81.