Transaction Costs

 Transaction costs, or, What matters more: your brain or your wallet?

Image of John Lennon's mind. "Mind Games" by Derek Davalos.

Mind Games” by Derek Davalos / CC 3.0

What motivates people to settle their lawsuits once a case is open?

Courts across the United States are experimenting with different models to nudge parties toward resolving disputes short of trial. One model mandates that parties attend a “settlement day” prior to their scheduled trial date. Unlike other mandatory court-affiliated settlement, however, there is no prescribed mediation or conference before the judge or other judicial officer. The only difference between settling in court and settling out of court is just that: the court.

The economic theory of transaction costs posits that a variety of obstacles (e.g., time, finances, reputation) can impede mutually beneficial agreements. One of its main lessons is that two parties will always reach an agreement—regardless of who holds a legal right—when transaction costs are zero. In courts and other public policy decisions, the goal is often to minimize transaction costs to facilitate negotiation. By extension, under this line of thinking, raising transaction costs would make an agreement less likely.

The mandatory settlement day effectively represents one of those transaction costs to the parties, who are otherwise free to negotiate and settle without taking the time off work to travel to court and spend the day in the courthouse. This is particularly true in eviction cases, where both parties clearly are familiar with one another and at least one party quite literally knows where the other party lives.

Federal Court Mediation

Alternative Dispute Resolution (ADR)

Almost every court system in the nation has an ADR program, and for most courts, at least some classes of litigants are compelled to use it before or during formal litigation.

The most common forms of ADR are:

  • Mediation: sessions in which the parties and/or their lawyers meet with a neutral (the “mediator”) who attempts to find common ground.  Mediation format can be caucus or non-caucus, depending on whether (or not) the mediator meets each party outside of the presence of the other.  Mediation can be evaluative or facilitative, depending on whether (or not) the mediator provides her views as to the merit of the dispute.
  • Judicial settlement conference: similar to mediations in the goal and the format, but the neutral is a judge or other decision-maker. Judicial settlement conferences are evaluative.

The Debate Surrounding ADR

Proponents of ADR clam that it furthers social welfare on at least four separate dimensions:

  1. conserving judicial resources,
  2. conserving party resources,
  3. increasing party satisfaction, and
  4. increasing party compliance with the decision or outcome.

Opponents, meanwhile, claim that direct negotiation can achieve these same benefits, and that the high cost of litigation provides a strong incentive for parties to settle on their own. The question, therefore, is whether the presence of the ADR neutral (a mediator, a judge) is really necessary to help the parties do what they could do on their own via direct negotiation.

Who is right? We do not know. There is little reliable evidence of any kind, and no reliable evidence at all from the past 20 years, to assess ADR effectiveness along any of these four dimensions discussed above.

The Study

The present study is the first of any kind to evaluate rigorously all of the dimensions ADR proponents cite in advocating such programs. We conducted a randomized control trial in one setting: civil rights cases brought by inmates in one federal correctional facility in Nevada.

Field operation

After a thorough screening and intake process, consenting individuals were randomized into one of two groups:

  • Treated group: mediation
  • Control group: strong suggestion to negotiate


Randomization has closed, and more than half of the cases have reached final resolution. Data we will analyze:

  • Federal court case records
  • Number of hours spent by state attorneys general per case
  • Case outcomes, in both settlements and court orders
  • Inmate plaintiff surveys
  • Future complaints

The Research Team

Jim Greiner, Faculty Director, The Access to Justice Lab; Professor of Law, Harvard Law School