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Optimal Litigation Strategies with Signaling and Screening

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  • Philippe Choné
  • Laurent Linnemer

Abstract

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.

Suggested Citation

  • Philippe Choné & Laurent Linnemer, 2008. "Optimal Litigation Strategies with Signaling and Screening," CESifo Working Paper Series 2334, CESifo.
    • Handle: RePEc:ces:ceswps:_2334
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    References listed on IDEAS

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    1. Andrew F. Daughety & Jennifer F. Reinganum, 1999. "Hush Money," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 661-678, Winter.
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    Cited by:

    1. Choné, Philippe & Linnemer, Laurent, 2010. "Optimal litigation strategies with observable case preparation," Games and Economic Behavior, Elsevier, vol. 70(2), pages 271-288, November.
    2. Ohlendorf, Susanne & Schmitz, Patrick, 2009. "Signaling an Outside Option," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 281, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Thomas D. Jeitschko & Byung-Cheol Kim, 2013. "Signaling, Learning, and Screening Prior to Trial: Informational Implications of Preliminary Injunctions," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(5), pages 1085-1113, October.
    4. Morin Chassé, Rémi, 2019. "Strategic behavior in environmental contests with asymmetric ability and reimbursement," International Review of Law and Economics, Elsevier, vol. 58(C), pages 115-126.
    5. Shaun Larcom & Mare Sarr, 2018. "On the Perils of Commitment to Punishment when Criminals Are Strategic," The Journal of Legal Studies, University of Chicago Press, vol. 47(2), pages 391-418.

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    More about this item

    Keywords

    case preparation; settlement; trial; signaling;
    All these keywords.

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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