Optimal Litigation Strategies with Signaling and Screening
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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- 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.
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- Hay, Bruce L, 1995. "Effort, Information, Settlement, Trial," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 29-62, January.
- Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
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