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The Use of "Most-Favored-Nation" Clauses in Settlement of Litigation

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  • Spier, Kathryn E

Abstract

Many settlement contracts in litigation involving multiple plaintiffs (or multiple defendants) include "most-favored-nation" (MFN) clauses. If an early settlement includes an MFN and the defendant settles later with another plaintiff for more money, the early settlers receive these terms too. If the defendant knows the aggregate distribution of expected awards but cannot discriminate among the privately informed plaintiffs, then MFNs avoid costly delay. Plaintiffs with weak cases settle early rather than on the courthouse steps. The effects of MFNs on the settlement terms, plaintiffs' welfare, litigation rates, and the defendant's ex ante incentives are considered and alternative explanations are explored. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Spier, Kathryn E, 2003. "The Use of "Most-Favored-Nation" Clauses in Settlement of Litigation," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 78-95, Spring.
    • Handle: RePEc:rje:randje:v:34:y:2003:i:1:p:78-95
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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," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 812-837.
    2. Xu, Frances Zhiyun, 2011. "Optimal best-price policy," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 628-643, September.
    3. Christopher C. Klein, 2007. "Anticompetitive Litigation and Antitrust Liability," Working Papers 200713, Middle Tennessee State University, Department of Economics and Finance.
    4. Hua, Xinyu, 2012. "The right of first offer," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 389-397.
    5. 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.

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