Exploiting Future Settlements: A Signalling Model of Most-Favored-Nation Clauses In Settlement Bargaining
"Most-favored-nation" (hereafter, MFN) clauses have been used in analyses of international trade, durable goods monopoly pricing, and franchise contracting to address a repeat player's time-inconsistency problem. Recent work by Spier (forthcoming and 2002) has extended this perspective to the settlements of litigation by (for example) one defendant with a collection of plaintiffs. We examine a different motivation for the use of MFNs in settlement bargaining. We argue that a non-repeat player can use an MFN to extend her reach into subsequent bargaining games. That is, an early-bargaining plaintiff can use an MFN to modify the subsequent bargaining game between the defendant and a later-bargaining plaintiff in a manner that improves the early plaintiff's payoff. Moreover, we will identify two routes through which this improvement is achieved. The obvious route is that, if the MFN is triggered by the later settlement, the early plaintiff receives an additional payment. The less obvious route is that the early plaintiff's incentives for information-revelation can be enhanced by the potential for a future payment, so that the defendant can resort to trial on a less-frequent basis. Using a signaling model, we find that the repeat player (the defendant) is indifferent about the MFN, while the later plaintiff is always worse off when an MFN constrains her settlement bargaining with the defendant. Although MFNs can never provide a Pareto improvement in this model, we demonstrate that plausible circumstances exist under which total surplus is increased by an MFN.
|Date of creation:||Aug 2002|
|Date of revision:||Oct 2002|
|Contact details of provider:|| Web page: http://www.vanderbilt.edu/econ/wparchive/index.html|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephan, Levy, 2004. "Best-price Guarantees as a Quality Signal," MPRA Paper 13466, University Library of Munich, Germany, revised 02 Nov 2004.
- Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
- Cooper, Thomas E. & Fries, Timothy L., 1991. "The most-favored-nation pricing policy and negotiated prices," International Journal of Industrial Organization, Elsevier, vol. 9(2), pages 209-223, June.
- 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.
- Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
When requesting a correction, please mention this item's handle: RePEc:van:wpaper:0221. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley)
If references are entirely missing, you can add them using this form.