Settlement Bargaining and the Design of Damage Awards

Kathryn E Spier

The Journal of Law, Economics, and Organization, 1994, vol. 10, issue 1, 84-95

Abstract: An injurer undertakes precautions to reduce both the probability and the severity of an accident. The damages that the victim suffers are privately observed, and will be verified at a cost if the case is litigated. While finely tuned damage awards induce the injurer to take appropriate precautions ex ante, they increase the probability that the litigants will disagree about the case and thereby aggravate the settlement process. Flat damage awards reduce the level of costly litigation but lead to underinvestment in precautions. We show that when the litigation costs are small the optimal award is finely tuned to the actual damages, and when litigation costs are large the optimal award is a flat penalty. Applications to scheduled damages and workers' compensation are discussed. Copyright 1994 by Oxford University Press.

Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (28)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jleorg:v:10:y:1994:i:1:p:84-95

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Journal of Law, Economics, and Organization is currently edited by Andrea Prat

More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().