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Litigation and Settlement under Judicial Agency

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  • 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. Daughety, Andrew F. & Reinganum, Jennifer F., 1994. "Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency," International Review of Law and Economics, Elsevier, vol. 14(3), pages 283-298, September.
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  3. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations As Evidence in Court," Game Theory and Information 9403008, EconWPA.
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  6. Shavell, Steven, 1999. "The level of litigation: private versus social optimality of suit and of settlement," International Review of Law and Economics, Elsevier, vol. 19(1), pages 99-115, March.
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  9. Hylton, Keith N., 2002. "An asymmetric-information model of litigation," International Review of Law and Economics, Elsevier, vol. 22(2), pages 153-175, August.
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  14. 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.
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  16. Barry Nalebuff, 1987. "Credible Pretrial Negotiation," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 198-210, Summer.
  17. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  18. Kaplow, Louis, 1994. "The Value of Accuracy in Adjudication: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 307-401, January.
  19. 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.
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