Against Compromise: A Mechanism Design Approach
AbstractWe 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 InfoPaper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp290.
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.
litigation; settlement; fee-shifting; pleadings; deterrence;
Other versions of this item:
- Alon Klement & Zvika Neeman, 2005. "Against Compromise: A Mechanism Design Approach," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 21(2), pages 285-314, October.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-15 (All new papers)
- NEP-CDM-2003-05-15 (Collective Decision-Making)
- NEP-LAW-2003-05-15 (Law & Economics)
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- J.J. Prescott & Kathryn E. Spier & Albert Yoon, 2014. "Trial and Settlement: A Study of High-Low Agreements," NBER Working Papers 19873, National Bureau of Economic Research, Inc.
- Neeman, Zvika & Pavlov, Gregory, 2013. "Ex post renegotiation-proof mechanism design," Journal of Economic Theory, Elsevier, vol. 148(2), pages 473-501.
- Madhav S. Aney, 2012. "Conflict with Quitting Rights: A Mechanism Design Approach," Working Papers 18-2012, Singapore Management University, School of Economics.
- Zvika Neeman & Gregory Pavlov, 2010. "Renegotiation-proof Mechanism Design," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 20101, University of Western Ontario, Department of Economics.
- Andrew F. Daughety & Jennifer F. Reinganum, 2014. "Settlement and Trial: Selected Analyses of the Bargaining Environment," Vanderbilt University Department of Economics Working Papers 14-00006, Vanderbilt University Department of Economics.
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