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Why Go to Court? Bargaining Failure under the Shadow of Trial with Complete Information

Author

Listed:
  • Michael McBride

    () (Department of Economics, University of California-Irvine)

  • Stergios Skaperdas

    () (Department of Economics, University of California-Irvine)

  • Pi-Han Tsai

    () (Department of Economics, University of California-Irvine)

Abstract

Why do legal disputes ever go to trial? Prior research emphasizes the role of mistakes, irrationalities, or asymmetric information because rational litigants with complete or symmetric information should choose pre-trial settlements over the costs and risks of trial. Using a dynamic incomplete-contracting framework, we provide an overlooked rationale for going to court. Even though risky and costly, going to court can be both rational and socially efficient when a court decision enhances property rights and deters future costly litigation. Experimental evidence supports these predictions. Our findings provide new insights into the incidence of litigation and trial.

Suggested Citation

  • Michael McBride & Stergios Skaperdas & Pi-Han Tsai, 2014. "Why Go to Court? Bargaining Failure under the Shadow of Trial with Complete Information," Working Papers 131406, University of California-Irvine, Department of Economics.
  • Handle: RePEc:irv:wpaper:131406
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    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2013-14/13-14-06.pdf
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    References listed on IDEAS

    as
    1. Stergios Skaperdas & Samarth Vaidya, 2012. "Persuasion as a contest," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 465-486, October.
    2. William M. Landes, 1974. "An Economic Analysis of the Courts," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 164-214 National Bureau of Economic Research, Inc.
    3. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
    4. Powell, Robert, 2006. "War as a Commitment Problem," International Organization, Cambridge University Press, vol. 60(01), pages 169-203, January.
    5. Garfinkel, M.R. & Skaperdas, S., 2000. "Conflict without Misperceptions or Incomplete Information: how the Future Matters," Papers 99-00-11, California Irvine - School of Social Sciences.
    6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    7. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    8. Che, Yeon-Koo & Yi, Jong Goo, 1993. "The Role of Precedents in Repeated Litigation," Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 399-424, October.
    9. Farmer, Amy & Pecorino, Paul, 1999. "Legal Expenditure as a Rent-Seeking Game," Public Choice, Springer, vol. 100(3-4), pages 271-288, September.
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    Citations

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    Cited by:

    1. Garfinkel, Michelle R. & Syropoulos, Constantinos, 2015. "Trade openness and the settlement of domestic disputes in the shadow of the future," Research in Economics, Elsevier, vol. 69(2), pages 191-213.
    2. McBride, Michael & Skaperdas, Stergios, 2014. "Conflict, settlement, and the shadow of the future," Journal of Economic Behavior & Organization, Elsevier, vol. 105(C), pages 75-89.

    More about this item

    Keywords

    Litigation; Court; Conflict; Contests;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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