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Exploiting Plaintiffs through Settlement: Divide and Conquer

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  • Yeon-Koo Che
  • Kathryn E. Spier

Abstract

This paper considers settlement negotiations between a single defendant and N plaintiffs when there are fixed costs of litigation. When making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant adopts a divide-and-conquer strategy. Plaintiffs settle their claims for less than they are jointly worth. The problem is worse when N is larger, the offers are sequential, and the plaintiffs make offers instead. Although divide-and-conquer strategies dilute the defendant's incentives, they increase the settlement rate and reduce litigation spending. Plaintiffs can raise their joint payoff through transfer payments, voting rules, and covenants not to accept discriminatory offers.

Suggested Citation

  • Yeon-Koo Che & Kathryn E. Spier, 2008. "Exploiting Plaintiffs through Settlement: Divide and Conquer," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 4-23, March.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200803)164:1_4:eptsda_2.0.tx_2-g
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 812-837.
    2. Berlemann, Michael & Christmann, Robin, 2014. "Determinants of In-Court Settlements Empiricial Evidence from a German Trial Court," Working Paper 155/2014, Helmut Schmidt University, Hamburg.
    3. Claudia M. Landeo & Kathryn E. Spier, 2009. "Naked Exclusion: An Experimental Study of Contracts with Externalities," American Economic Review, American Economic Association, vol. 99(5), pages 1850-1877, December.
    4. Andrew F. Daughety & Reinganum F. Reinganum, 2014. "Settlement and Trial: Selected Analyses of the Bargaining Environment," Vanderbilt University Department of Economics Working Papers 14-00005, Vanderbilt University Department of Economics.
    5. Stremitzer, Alexander, 2008. "Plaintiffs exploiting Plaintiffs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 224, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    6. Cason, Timothy N. & Mui, Vai-Lam, 2015. "Rich communication, social motivations, and coordinated resistance against divide-and-conquer: A laboratory investigation," European Journal of Political Economy, Elsevier, vol. 37(C), pages 146-159.
    7. Stremitzer, Alexander, 2008. "Plaintiffs exploiting Plaintiffs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 224, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "A dynamic model of lawsuit joinder and settlement," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 471-494, September.
    9. Christoph Engel & Urs Schweizer, 2008. "Editorial Preface," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 1-3, March.
    10. Alexander Stremitzer, 2008. "Exploiting Plaintiffs through Settlement: Divide and Conquer. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 27-30, March.
    11. Miklós-Thal, Jeanine & Shaffer, Greg, 2017. "Private contracting with externalities: Divide and conquer?," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 460-472.
    12. Christoph March & Robert K. von Weizsäcker, 2016. "Coordinating Intergenerational Redistribution and the Repayment of Public Debt," CESifo Working Paper Series 6075, CESifo Group Munich.
    13. Guttel, Ehud & Leshem, Shmuel, 2013. "Bargaining around cost–benefit standards," Journal of Public Economics, Elsevier, vol. 103(C), pages 55-67.

    More about this item

    JEL classification:

    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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