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Why Go to Court? Bargaining Failure under the Shadow of Trial with Complete Information

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Author Info

  • Michael McBride

    ()
    (Department of Economics, University of California-Irvine)

  • Stergios Skaperdas

    ()
    (Department of Economics, University of California-Irvine)

  • Pi-Han Tsai

    ()
    (Department of Economics, University of California-Irvine)

Abstract

Why do legal disputes ever go to trial? Prior research emphasizes the role of mistakes, irrationalities, or asymmetric information because rational litigants with complete or symmetric information should choose pre-trial settlements over the costs and risks of trial. Using a dynamic incomplete-contracting framework, we provide an overlooked rationale for going to court. Even though risky and costly, going to court can be both rational and socially efficient when a court decision enhances property rights and deters future costly litigation. Experimental evidence supports these predictions. Our findings provide new insights into the incidence of litigation and trial.

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File URL: http://www.economics.uci.edu/files/economics/docs/workingpapers/2013-14/13-14-06.pdf
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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 131406.

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Length: 44 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:irv:wpaper:131406

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Keywords: Litigation; Court; Conflict; Contests;

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  1. Michelle R Garfinkel & Stergios Skaperdas, 2001. "Conflict Without Misperceptions or Incomplete Information: How the Future Matters," Levine's Working Paper Archive 563824000000000011, David K. Levine.
  2. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 13(1), pages 1-56, January.
  3. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  4. Powell, Robert, 2006. "War as a Commitment Problem," International Organization, Cambridge University Press, Cambridge University Press, vol. 60(01), pages 169-203, January.
  5. William M. Landes, 1974. "An Economic Analysis of the Courts," NBER Chapters, National Bureau of Economic Research, Inc, in: Essays in the Economics of Crime and Punishment, pages 164-214 National Bureau of Economic Research, Inc.
  6. Stergios Skaperdas & Samarth Vaidya, 2007. "Persuasion as a Contest," CESifo Working Paper Series 2160, CESifo Group Munich.
  7. repec:att:wimass:9120 is not listed on IDEAS
  8. Farmer, Amy & Pecorino, Paul, 1999. " Legal Expenditure as a Rent-Seeking Game," Public Choice, Springer, Springer, vol. 100(3-4), pages 271-88, September.
  9. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  10. Che, Yeon-Koo & Yi, Jong Goo, 1993. "The Role of Precedents in Repeated Litigation," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 9(2), pages 399-424, October.
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