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Litigation with Symmetric Bargaining and Two-Sided Incomplete Information

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  • Daniel Friedman
  • Donald Wittman

Abstract

We construct game-theoretic foundations for bargaining in the shadow of a trial. Plaintiff and defendant both have noisy signals of a common-value trial judgment and make simultaneous offers to settle. If the offers cross, they settle on the average offer; otherwise, both litigants incur an additional cost and the judgment is imposed at trial. We obtain an essentially unique Nash equilibrium and characterize its conditional trial probabilities and judgments. Some of the results are intuitive. For example, an increase in trial cost (or a decrease in the range of possible outcomes) reduces the probability of a trial. We obtain a precise nonlinear expression for the relationship. Other results reverse findings from previous literature. For example, trials are possible even when the defendant's signal indicates a higher potential judgment than the plaintiff's signal, and when trial costs are low, middling cases (rather than extreme cases) are more likely to settle. Copyright 2007, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jleo/ewm004
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Bibliographic Info

Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

Volume (Year): 23 (2007)
Issue (Month): 1 (April)
Pages: 98-126

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Handle: RePEc:oup:jleorg:v:23:y:2007:i:1:p:98-126

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  1. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Settlement Negotiations with Two-Sided Asymmetric Information: Model Duality, Information Distribution and Efficiency," Game Theory and Information 9403009, EconWPA.
  2. Shavell, Steven, 1996. "Any Frequency of Plaintiff Victory at Trial Is Possible," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 493-501, June.
  3. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
  4. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March.
  5. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  6. Lawrence M. Ausubel & Peter Cramton & Raymond J. Deneckere, 2002. "Bargaining with Incomplete Information," Papers of Peter Cramton 02barg, University of Maryland, Department of Economics - Peter Cramton, revised 12 Mar 2001.
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Cited by:
  1. Bertrand Chopard & Thomas Cortade & Eric Langlais, 2008. "Trial and settlement negotiations between asymmetrically skilled parties," EconomiX Working Papers 2008-32, University of Paris West - Nanterre la Défense, EconomiX.
  2. Dari-Mattiacci, Giuseppe & Deffains, Bruno & Lovat, Bruno, 2011. "The dynamics of the legal system," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1), pages 95-107.

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