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Settlement Bargaining and the Design of Damage Awards

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  • Spier, Kathryn E

Abstract

An injurer undertakes precautions to reduce both the probability and the severity of an accident. The damages that the victim suffers are privately observed, and will be verified at a cost if the case is litigated. While finely tuned damage awards induce the injurer to take appropriate precautions ex ante, they increase the probability that the litigants will disagree about the case and thereby aggravate the settlement process. Flat damage awards reduce the level of costly litigation but lead to underinvestment in precautions. We show that when the litigation costs are small the optimal award is finely tuned to the actual damages, and when litigation costs are large the optimal award is a flat penalty. Applications to scheduled damages and workers' compensation are discussed. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Spier, Kathryn E, 1994. "Settlement Bargaining and the Design of Damage Awards," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(1), pages 84-95, April.
  • Handle: RePEc:oup:jleorg:v:10:y:1994:i:1:p:84-95
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    Cited by:

    1. Chris Sanchirico & George Triantis, "undated". "Evidence Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance," Scholarship at Penn Law upenn_wps-1005, University of Pennsylvania Law School.
    2. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 1-38, March.
    3. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
    4. Matthias Kräkel, 2010. "Double-Sided Moral Hazard, Efficiency Wages, and Litigation," Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(2), pages 337-364.
    5. A. Mitchell Polinsky & Daniel L. Rubinfeld, 2005. "A Damage-Revelation Rationale for Coupon Remedies," NBER Working Papers 11227, National Bureau of Economic Research, Inc.
    6. Zhou, J., 2010. "Access to justice : An economic approach," Other publications TiSEM 9d70f451-35c4-4878-92bf-7, Tilburg University, School of Economics and Management.
    7. Dan Bernhardt & Ed Nosal, 2004. "Near-sighted Justice," Journal of Finance, American Finance Association, vol. 59(6), pages 2655-2684, December.
    8. Bartsch, Elga, 1997. "Environmental liability, imperfect information, and multidimensional pollution control," International Review of Law and Economics, Elsevier, vol. 17(1), pages 139-146, March.
    9. Ashenfelter, Orley & Bloom, David E. & Dahl, Gordon B., 2013. "Lawyers as Agents of the Devil in a Prisoner's Dilemma Game: Evidence from Long Run Play," IZA Discussion Papers 7245, Institute for the Study of Labor (IZA).
    10. Philip Bond, 2004. "Optimal plaintiff incentives when courts are imperfect," 2004 Meeting Papers 723, Society for Economic Dynamics.
    11. Shavell, Steven, 1999. "The level of litigation: private versus social optimality of suit and of settlement," International Review of Law and Economics, Elsevier, vol. 19(1), pages 99-115, March.
    12. Friehe, Tim & Miceli, Thomas J., 2014. "Marginal deterrence when offenders act sequentially," Economics Letters, Elsevier, vol. 124(3), pages 523-525.
    13. Bond, Philip & Newman, Andrew F., 2009. "Prohibitions on punishments in private contracts," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 526-540, October.
    14. Xinyu Hua & Kathryn E. Spier, 2004. "Information and Externalities in Sequential Litigation," NBER Working Papers 10943, National Bureau of Economic Research, Inc.
    15. Wohlschlegel, Ansgar, 2014. "The Appeals Process and Incentives to Settle," MPRA Paper 59424, University Library of Munich, Germany.
    16. Friehe, Tim, 2009. "Screening accident victims," International Review of Law and Economics, Elsevier, vol. 29(3), pages 272-280, September.

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