Litigation and Pretrial Negotiation under Incomplete Information

Gyu Ho Wang, Jeong-Yoo Kim and Yi, Jong-Goo

Journal of Law, Economics and Organization, 1994, vol. 10, issue 1, pages 187-200

Abstract: We formulate a pretrial negotiation problem as an infinite-horizon bargaining model with one-sided uncertainty and alternating offers, with the informed party having an outside option. The plaintiff has private information and also has an outside option of "going to court." The defendant moves first. We show that there exists a unique sequential equilibrium. In equilibrium, when the defendant makes an offer, all the plaintiffs whose net recovery from litigation is greater (smaller) than the offer, reject it (accept it) and go to court next period. Hence, along the equilibrium path, the game lasts at most two periods. Copyright 1994 by Oxford University Press.

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