Abstract
This paper considers a model of out-of-court settlement negotiations in which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will fail to attain negotiated settlements (at least some of the time). Second, there is a fundamental tradeoff between settlement efficiency and equity. Increasing the frequency of out-of-court settlements inevitably means adopting settlements that are less responsive to the true merits of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average court expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court costs results in a fall in the frequency of litigation.
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Samuelson, W.F. Settlements out of Court: Efficiency and Equity. Group Decision and Negotiation 7, 157–177 (1998). https://doi.org/10.1023/A:1008602608852
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DOI: https://doi.org/10.1023/A:1008602608852