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Litigation With Symmetric Bargaining And Two-Sided Incomplete Information

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  • Friedman, Daniel
  • Wittman, Donald

Abstract

We construct game theoretic foundations for bargaining in the shadow of a trial. Plaintiff and defendant both have noisy signals of a common-value trial judgment and make simultaneous offers to settle. If the offers cross, they settle on the average offer; otherwise, both litigants incur an additional cost and the judgment is imposed at trial. We obtain an essentially unique NE and characterize its conditional trial probabilities and judgments. Some of the results are intuitive, e.g., an increase in trial cost (or a decrease in the range of possible outcomes) reduces the probability of a trial. Other results reverse findings from previous literature. For example, trials are possible even when the defendant’s signal indicates a higher potential judgment than the plaintiff’s signal, and when trial costs are low, the middling cases (rather than the extreme cases) are more likely to settle.

Suggested Citation

  • Friedman, Daniel & Wittman, Donald, 2003. "Litigation With Symmetric Bargaining And Two-Sided Incomplete Information," Santa Cruz Department of Economics, Working Paper Series qt7vj7k9f6, Department of Economics, UC Santa Cruz.
  • Handle: RePEc:cdl:ucscec:qt7vj7k9f6
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    1. Daughety, Andrew F. & Reinganum, Jennifer F., 1994. "Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency," International Review of Law and Economics, Elsevier, vol. 14(3), pages 283-298, September.
    2. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945, Elsevier.
    3. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March.
    4. Kalyan Chatterjee & William Samuelson, 1983. "Bargaining under Incomplete Information," Operations Research, INFORMS, vol. 31(5), pages 835-851, October.
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    Cited by:

    1. Chopard, Bertrand & Cortade, Thomas & Langlais, Eric, 2010. "Trial and settlement negotiations between asymmetrically skilled parties," International Review of Law and Economics, Elsevier, vol. 30(1), pages 18-27, March.

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