Conjectures and underpricing in repeated mass disputes with heterogeneous plaintiffs

The present Bayes-conjectural model focuses on a single defendant repeatedly formulating settlement offers when facing a heterogeneous population of victims. As usual, victims are risk-averse. However, the defendant cannot know the victims’ characteristics or their distribution. The defendant is endowed with an initial conjecture on the victims’ aggregate behavior. On each date, it formulates a settlement offer and updates the conjecture based on what it observes. We show that there is a multiplicity of conjectural equilibria and that the one reached depends on the initial conjecture. Independent of the degree of victims’ risk aversion, an equilibrium settlement can underprice the correct value of the claim. The results show that higher defendant court fees and aggregate procedures may alleviate the underpricing problem.