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Optimal litigation strategies with observable case preparation

  • Choné, Philippe
  • Linnemer, Laurent

This paper investigates the strategic effects of case preparation in litigation. Specifically, it shows how the pretrial efforts incurred by one party may alter its adversary's incentives to settle. We build a sequential game with one-sided asymmetric information where the informed party first decides to invest in case preparation, and the uninformed party then makes a settlement offer. Overinvestment, or bluff, always prevails in equilibrium: with positive probability, plaintiffs with weak cases take a chance on investing, and regret it in case of trial. Furthermore, due to the endogenous investment decision, the probability of trial may (locally) decrease with case strength. Overinvestment generates inefficient preparation costs, but may trigger more settlements, thereby reducing trial costs.

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File URL: http://www.sciencedirect.com/science/article/pii/S0899-8256(10)00041-2
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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 70 (2010)
Issue (Month): 2 (November)
Pages: 271-288

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Handle: RePEc:eee:gamebe:v:70:y:2010:i:2:p:271-288
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Barry Nalebuff, 1987. "Credible Pretrial Negotiation," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 198-210, Summer.
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  5. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Economic Theories of Settlement Bargaining," Vanderbilt University Department of Economics Working Papers 0508, Vanderbilt University Department of Economics.
  6. Philippe Choné & Laurent Linnemer, 2008. "Optimal Litigation Strategies with Signaling and Screening," CESifo Working Paper Series 2334, CESifo Group Munich.
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  8. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers 0703, Vanderbilt University Department of Economics.
  9. Fernando Gomez-Pomar, 2008. "Cashing by the Hour: Why Large Law Firms Prefer Hourly Fees over Contingent Fees," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(2), pages 458-475, October.
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  16. Kathryn E. Spier, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 93-108.
  17. Lucian Arye Bebchuk, 1987. "Suing Solely to Extract a Settlement Offer," NBER Working Papers 2161, National Bureau of Economic Research, Inc.
  18. Warren F. Schwartz & Abraham L. Wickelgren, 2009. "Credible discovery, settlement, and negative expected value suits," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 636-657.
  19. Joel L. Schrag, 1999. "Managerial Judges: An Economic Analysis of the Judicial Management of Legal Discovery," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 305-323, Summer.
  20. 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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