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

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 during 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 difference 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.