Strategic Information Acquisition in Models of Settlement and Litigation

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Since most lawsuits never go to trial, there is a growing literature on the economics of settlement as well as litigation. In the basic economic models, information is asymmetrically distributed among the parties and the timing sequence of settlement proposals is specified exogenously. In contrast to such efforts, new work by Daughety and Reinganum aims to take better account of the realities of negotiation and settlement by allowing both parties to influence the availability of information and the timing of proposals. Using models derived from game theory, these investigators examine the conditions under which information will be exchanged and the impact of that information on settlement. The research specifically focuses on procedural and institutional design issues relating to the use of information in pre-trial bargaining in civil cases. The extended model allows for voluntary disclosure of information, for uncertain liability and damages, and for the strategic use of the discovery process. Also, it permits analyzing the effects of making pre-trial negotiations admissible evidence in court, the effects of liability and damage rules on the settlement process, and the effects on the settlement process of countersuits by the defendant and multiple suits against the defendant. As conceptualized, this modelling promises to explore both a richer set of informational assumptions and a broader range of procedural devices than heretofore exists on litigation and settlement. In real-life conditions for settlement, exchange of information and strategic decisions by both parties are subject to a variety of discovery and liability rules. This effort holds promise of capturing these dynamics and moving beyond the highly stylized models of the pre-trial process.