An Empirical Investigation of Settlement & Litigation - The Case of Taiwan Labor Disputes

Using newly collected data on the labor dispute in Taiwan, we study the selection process of cases settled out of court, cases dropped after settlement fails, and cases actually brought to the court. We find that the size of the stakes plays an important role in the interrelation between settlement and litigation. In particular, our study shows that increasing stakes would decrease the probability of settlement, decrease the recovery rate in settlement, and increase the probability of litigation after settlement fails. The result of our empirical analysis indicates that while the plaintiff's creditability of threatening a lawsuit is an important issue, this credibility issue is not so important as to undermine the pattern that an increase in the stakes would decrease the likelihood of settlement. Our study also reveals that the mediation mechanism performs the function of allowing workers with small claims to obtain effective recovery, which would have been impossible if those workers had to resort to litigation. This result also suggests that the traditional models are inadequate in explaining the settlement mechanism of disputes involving small claims. Finally, we find that the workers' risk-aversion might cause their recovery rate in settlement drops as the amount of their initial claims increase