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Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency

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  • Daughety, Andrew F.
  • Reinganum, Jennifer F.

Abstract

We analyze a settlement and litigation game in which both parties possess private information relevant to the value of a claim. The plaintiff knows the level of damages, while the defendant knows the probability he will be held liable for those damages. We consider two alternatives: (1) the plaintiff proposes a settlement, which the defendant accepts or rejects; and (2) the defendant proposes a settlement, which the plaintiff accepts or rejects. Despite the extensive symmetry of the model, these alternatives will generally result in different equilibrium expected frequencies of trial, and therefore different social efficiencies.
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Suggested Citation

  • 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.
    • Handle: RePEc:eee:irlaec:v:14:y:1994:i:3:p:283-298
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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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