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Against Compromise: A Mechanism Design Approach

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  • Alon Klement

    ()

  • Zvika Neeman

    ()

Abstract

We consider the following situation. A risk-neutral plaintiff sues a risk-neutral defendant for damages that are normalized to one. The defendant knows whether she is liable or not, but the plaintiff does not. We ask what are the settlement procedure and fee-shifting rule (which, together, we call a mechanism) that minimize the rate of litigation subject to maintaining deterrence. Two main results are presented. The ?rst is a characterization of an upper bound on the rate of settlement that is consistent with maintaining deterrence. This upper bound is shown to be independent of the litigants' litigation cost. It is further shown that any mechanism that attains this upper bound must employ the English fee-shifting rule according to which all litigation costs are shifted to the loser in trial. The second result describes a simple practicable mechanism that attains this upper bound. We discuss our results in the context of recent legal reforms in the U.S. and U.K.

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Bibliographic Info

Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp290.

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Length: 29 pages
Date of creation: Jul 2003
Date of revision:
Publication status: Published in Journal of Law, Economics, and Organization, 2004, vol. 21, pp. 285-314.
Handle: RePEc:huj:dispap:dp290

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Keywords: litigation; settlement; fee-shifting; pleadings; deterrence;

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Cited by:
  1. Zvika Neeman & Gregory Pavlov, 2010. "Renegotiation-proof Mechanism Design," UWO Department of Economics Working Papers 20101, University of Western Ontario, Department of Economics.
  2. Madhav S. Aney, 2012. "Conflict with Quitting Rights: A Mechanism Design Approach," Working Papers 18-2012, Singapore Management University, School of Economics.
  3. Neeman, Zvika & Pavlov, Gregory, 2013. "Ex post renegotiation-proof mechanism design," Journal of Economic Theory, Elsevier, vol. 148(2), pages 473-501.

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