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Optimal Litigation Strategies with Signaling and Screening

  • Philippe Choné
  • Laurent Linnemer

This paper examines the strategic effects of case preparation in litigation. Specifically, it shows how the pretrial efforts incurred by one party may alter its adversary’s incentives to settle. We build a sequential game with one-sided asymmetric information where the informed party first decides to invest, or not, in case preparation, and the uninformed party then makes a settlement offer. Overinvestment, or bluff, always prevails in equilibrium: with positive probability, plaintiffs with weak cases take a chance on investing, and regret it in case of trial. Furthermore, due to the endogenous investment decision, the probability of trial may (locally) decrease with case strength. Overinvestment generates inefficient preparation costs, but may trigger more settlements, thereby reducing trial costs.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-06/cesifo1_wp2334.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2334.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2334
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  1. Hay, Bruce L, 1995. "Effort, Information, Settlement, Trial," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 29-62, January.
  2. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  3. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  4. Kaplan, David S. & Sadka, Joyce & Silva-Mendez, Jorge Luis, 2007. "Litigation and settlement : new evidence from labor courts in Mexico," Policy Research Working Paper Series 4434, The World Bank.
  5. Andrew F. Daughety & Jennifer F. Reinganum, 1999. "Hush Money," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 661-678, Winter.
  6. Joel L. Schrag, 1999. "Managerial Judges: An Economic Analysis of the Judicial Management of Legal Discovery," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 305-323, Summer.
  7. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
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