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Costly Voluntary Disclosure with Negative Expected Value Suits

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  • Amy Farmer
  • Paul Pecorino

Abstract

A standard result in the litigation literature is that the informed party will not make a costly voluntary disclosure in a screening game. We develop a screening game in which an uninformed plaintiff makes an offer to an informed defendant. Under the American rule for the allocation of trial costs, we find that the defendant will make a costly voluntary disclosure if he can demonstrate to the plaintiff that she has a negative expected value suit. By doing so, the defendant can induce the plaintiff to drop the lawsuit. This assumes that the cost of a voluntary disclosure is less than the cost of a full trial to the defendant. As a result of the information disclosure, the model will never exhibit the type of constrained equilibrium described by Nalebuff (1987, “Credible Pretrial Negotiation,” 18 RAND Journal of Economics 198–210).

Suggested Citation

  • Amy Farmer & Paul Pecorino, 2017. "Costly Voluntary Disclosure with Negative Expected Value Suits," American Law and Economics Review, Oxford University Press, vol. 19(2), pages 486-503.
  • Handle: RePEc:oup:amlawe:v:19:y:2017:i:2:p:486-503.
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    File URL: http://hdl.handle.net/10.1093/aler/ahx011
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    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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