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Litigation and Settlement under Judicial Agency

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Author Info

  • Levent Koçkesen

    () (Koc University)

  • Murat Usman

    () (Koc University)

Abstract

We model the settlement of a legal dispute where the trial outcome depends on the behavior of a strategically motivated judge. We consider a standard asymmetric information model where the uninformed defendant makes a take it or leave it offer. If the case goes to trial, the judge decides how much effort to exert to learn about the actual damages inflicted on the plaintiff. We show that under very general assumptions the model exhibits multiple equilibria. In equilibria in which the judge exerts less effort more cases settle out of court, and vice versa. The judge is better off in low effort equilibria, with a higher settlement rate. However, the terms of the settlement heavily favor the informed plaintiff, and consequently induce over-investment in ex ante preventive care by the defendant.

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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1121.

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Length: 24 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:koc:wpaper:1121

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Keywords: Litigation; settlement; trial; judges;

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  1. Rasmusen, Eric, 1995. "Predictable and unpredictable error in tort awards: The effect of plaintiff self-selection and signaling," International Review of Law and Economics, Elsevier, vol. 15(3), pages 323-345, September.
  2. Ezra Friedman & Abraham L. Wickelgren, 2010. "Chilling, Settlement, and the Accuracy of the Legal Process," Journal of Law, Economics and Organization, Oxford University Press, vol. 26(1), pages 144-157, April.
  3. Daughety, Andrew & Reinganum, Jennifer, 1994. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations as Evidence in Court," Working Papers 94-06, University of Iowa, Department of Economics.
  4. 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.
  5. Kima, Jeong-Yoo & Ryu, Keunkwan, 2000. "Pretrial negotiation behind open doors versus closed doors:: Economic analysis of Rule 408," International Review of Law and Economics, Elsevier, vol. 20(2), pages 285-294, June.
  6. Claudia M. Landeo & Maxim Nikitin & Scott Baker, 2007. "Deterrence, Lawsuits, and Litigation Outcomes Under Court Errors," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(1), pages 57-97, April.
  7. Murat Usman, 2002. "Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 67-94, April.
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