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Reconciling Asymmetric Information and Divergent Expectations Theories of Litigation

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  • Joel Waldfogel

Abstract

Both asymmetric information (AI) and divergent expectations (DE) theories offer possible explanations of the litigation puzzle. Under DE, cases proceed to trial when, by chance, the plaintiff is more optimistic than the defendant. As the fraction of cases tried (T) declines, this leads to a tendency toward 50 percent plaintiff win rates at trial (P), regardless of the fraction of plaintiff winners in the filed population. Under AI, by contrast, informed parties proceed to trial only when they expect to win. Hence, as the fraction of cases tried declines, plaintiff win rates at trial tend toward either 0 or 1. We present evidence that the relationship between T and P generated by the litigation process is consistent with DE and not AI. We also offer evidence of the presence of AI early in litigation in the form of one-sided plaintiff win rates in cases adjudicated prior to trial. We reconcile these two findings with evidence that pretrial adjudication and settlement culls both likely plaintiff winners and likely plaintiff losers from the filed pool, causing a tendency toward central rather than extreme plaintiff win rates at trial.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6409.

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Date of creation: Feb 1998
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Publication status: published as Journal of Law & Economics, Vol. 41, no. 2, part 1 (October 1998): 451-476.
Handle: RePEc:nbr:nberwo:6409

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  1. Eisenberg, Theodore, 1990. "Testing the Selection Effect: A New Theoretical Framework with Empirical Tests," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 19(2), pages 337-58, June.
  2. Hay, Bruce L, 1994. "Civil Discovery: Its Effects and Optimal Scope," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 23(1), pages 481-515, January.
  3. Joel Waldfogel, 1993. "The Selection Hypothesis and the Relationship between Trial and Plaintiff Victory," NBER Working Papers 4508, National Bureau of Economic Research, Inc.
  4. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  5. Barry Nalebuff, 1987. "Credible Pretrial Negotiation," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 198-210, Summer.
  6. Landes, William M, 1971. "An Economic Analysis of the Courts," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 14(1), pages 61-107, April.
  7. Siegelman, Peter & Donohue, John J, III, 1995. "The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 24(2), pages 427-62, June.
  8. Shavell, Steven, 1996. "Any Frequency of Plaintiff Victory at Trial Is Possible," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 25(2), pages 493-501, June.
  9. Cooter, Robert D & Rubinfeld, Daniel L, 1994. "An Economic Model of Legal Discovery," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 23(1), pages 435-63, January.
  10. Froeb, Luke, 1993. "The adverse selection of cases for trial," International Review of Law and Economics, Elsevier, Elsevier, vol. 13(3), pages 317-324, September.
  11. 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.
  12. Grossman, Gene M & Katz, Michael L, 1983. "Plea Bargaining and Social Welfare," American Economic Review, American Economic Association, American Economic Association, vol. 73(4), pages 749-57, September.
  13. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
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