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A Model of Welfare-Reducing Settlement

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  • Wickelgren Abraham L.

    (Bureau of Economics, Federal Trade Commission)

Abstract

While it is typically taken for granted that settlement of lawsuits increases social welfare, this paper shows that settlement can lower welfare. If the defendant has private information about the harm from his action both at the time of the action and the time of settlement bargaining, then defendants who cause different levels of harm can pay the same settlement amount in a partial pooling equilibrium. Settlement acts as a damage cap, preventing the defendant's liability from increasing with the harm over the full range of possible harms, leading to under-deterrence. This result holds even though the social planner can choose the socially optimal damage rule.

Suggested Citation

  • Wickelgren Abraham L., 2004. "A Model of Welfare-Reducing Settlement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-22, May.
    • Handle: RePEc:bpj:bejeap:v:contributions.3:y:2004:i:1:n:4
    DOI: 10.2202/1538-0645.1202
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    Cited by:

    1. Schwartz, Warren F. & Wickelgren, Abraham L., 2011. "Optimal antitrust enforcement: Competitor suits, entry, and post-entry competition," Journal of Public Economics, Elsevier, vol. 95(7), pages 967-972.
    2. Sylvain Bourjade & Patrick Rey & Paul Seabright, 2009. "Private Antitrust Enforcement In The Presence Of Pre‐Trial Bargaining," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 372-409, September.

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