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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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  • 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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    Cited by:

    1. Chopard, Bertrand & Cortade, Thomas & Langlais, Eric, 2010. "Trial and settlement negotiations between asymmetrically skilled parties," International Review of Law and Economics, Elsevier, vol. 30(1), pages 18-27, March.
    2. repec:kap:ejlwec:v:44:y:2017:i:2:d:10.1007_s10657-016-9540-5 is not listed on IDEAS
    3. Yerokhin Oleg, 2011. "The Social Cost of Blackmail," Review of Law & Economics, De Gruyter, vol. 7(1), pages 337-351, December.
    4. Gorkem Celik, 2015. "Implementation by Gradual Revelation," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 271-296, June.
    5. Langlais, Eric, 2008. "Cognitive dissonance, risk aversion and the pretrial negotiation impasse," MPRA Paper 8844, University Library of Munich, Germany.
    6. Samantha Bielen & Peter Grajzl & Wim Marneffe, 2017. "Understanding the Time to Court Case Resolution: A Competing Risks Analysis Using Belgian Data," CESifo Working Paper Series 6450, CESifo Group Munich.
    7. Avraham, Ronen & Bustos, Álvaro, 2010. "The unexpected effects of caps on non-economic damages," International Review of Law and Economics, Elsevier, vol. 30(4), pages 291-305, December.
    8. Pao-Li Chang, 2002. "The Evolution and Utilization of the GATT/WTO Dispute Settlement Mechanism," Working Papers 475, Research Seminar in International Economics, University of Michigan.
    9. Daniel Friedman & Donald Wittman, 2007. "Litigation with Symmetric Bargaining and Two-Sided Incomplete Information," Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(1), pages 98-126, April.
    10. Chris Kuo, 2014. "An Economic Analysis on Overbilling Incentives and Auditing Programs," Journal of Business Ethics, Springer, vol. 121(3), pages 441-449, May.
    11. Koçkesen, Levent & Usman, Murat, 2012. "Litigation and settlement under judicial agency," International Review of Law and Economics, Elsevier, vol. 32(3), pages 300-308.
    12. Heyes, Anthony & Rickman, Neil & Tzavara, Dionisia, 2004. "Legal expenses insurance, risk aversion and litigation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 107-119, March.
    13. Anne Duchêne, 2015. "Patent Litigation Insurance," Working Papers 2015-621, Department of Research, Ipag Business School.
    14. Osborne, Evan, 1999. "Who should be worried about asymmetric information in litigation?," International Review of Law and Economics, Elsevier, vol. 19(3), pages 399-409, September.
    15. Ayuso, Mercedes & Bermúdez, Lluís & Santolino, Miguel, 2015. "The dynamics of one-sided incomplete information in motor disputes," International Review of Law and Economics, Elsevier, vol. 41(C), pages 77-85.
    16. Éric Langlais, 2008. "Indemnisation des préjudices et fréquence des procès en présence d'une asymétrie d'information sur l'aversion au risque des parties," Recherches économiques de Louvain, De Boeck Université, vol. 74(2), pages 191-218.
    17. Santolino, Miguel, 2010. "Determinants of the decision to appeal against motor bodily injury judgements made by Spanish trial courts," International Review of Law and Economics, Elsevier, vol. 30(1), pages 37-45, March.
    18. Schwab, Christian & Tang, Hin-Yue Benny, 2011. "Die Steuerungswirkungen unterschiedlicher Prozesskostenregelungen: Ein Überblick zum Stand von Theorie und Empirie
      [The economic effects of alternative fee shifting rules: A review of the theoretic
      ," MPRA Paper 32746, University Library of Munich, Germany.
    19. Roland Kirstein, 2008. "Effizienzaspekte alternativer Streitbeilegung," FEMM Working Papers 08021, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    20. Peter Grajzl & Katarina Zajc, 2017. "Litigation and the timing of settlement: evidence from commercial disputes," European Journal of Law and Economics, Springer, vol. 44(2), pages 287-319, October.
    21. Douglas Cumming, 2001. "Settlement Disputes: Evidence from a Legal Practice Perspective," European Journal of Law and Economics, Springer, vol. 11(3), pages 249-280, May.
    22. Choné, Philippe & Linnemer, Laurent, 2010. "Optimal litigation strategies with observable case preparation," Games and Economic Behavior, Elsevier, vol. 70(2), pages 271-288, November.

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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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