Trial and Settlement Negotiations between Asymmetrically Skilled Parties

Eric Langlais, Bertrand Chopard, Thomas Cortade
2008 Social Science Research Network  
Parties engaged in a litigation generally enter the discovery process with different informations regarding their case and/or an unequal endowment in terms of skill and ability to produce evidence and predict the outcome of a trial. Hence, they have to bear different legal costs to assess the (equilibrium) plaintiff's win rate. The paper analyses pretrial negotiations and revisits the selection hypothesis in the case where these legal expenditures are private information. This assumption is
more » ... s assumption is consistent with empirical evidence (Osborne, 1999) . Two alternative situations are investigated, depending on whether there exists a unilateral or a bilateral informational asymmetry. Our general result is that efficient pretrial negotiations select cases with the smallest legal expenditures as those going to trial, while cases with largest costs prefer to settle. Under the one-sided asymmetric information assumption, we find that the American rule yields more trials and higher aggregate legal expenditures than the French and British rules. The two-sided case leads to a higher rate of trials, but in contrast provides less clear-cut predictions regarding the influence of fee-shifting. JEL classification: D81, K42. Keywords: litigation, unilateral and bilateral asymmetric information, legal expenditures. * We are gratefull to Michel Langlais and Bruno Lovat for their suggestions on section 3 of the paper, and to Andreea Cosnita for editorial assistance. We also thank Julien Penin, Luigi Franzoni, the participants to the BETAworkshop (Nancy, 11th may 2007) and to the 2007 EALE Annual Conference (Copenhagen, 13th-15th september 2007), for their comments on a previous draft of the paper.
doi:10.2139/ssrn.1141882 fatcat:tcdlczqt3bgs5lhzkzh6zp67q4