The role of nonbinding alternative dispute resolution in litigation

This paper analyzes pretrial mediation, in which a panel estimates the value of the plaintiff’s claim. Each party must decide whether to accept or reject the resulting award. If either party rejects, the case proceeds on toward trial; however, most cases are ultimately settled. We develop and then test a model in which each party has private information about the claim, but the mediation panel does not. The model predicts (1) the probability that each party accepts or rejects the mediation award, and (2) if the award is rejected and the case is later settled, how the settlement payment compares to the mediation award.