Litigation with Symmetric Bargaining and Two-Sided Incomplete Information

Daniel Friedman and Donald Wittman

The Journal of Law, Economics, and Organization, 2007, vol. 23, issue 1, 98-126

Abstract: We construct game-theoretic foundations for bargaining in the shadow of a trial. Plaintiff and defendant both have noisy signals of a common-value trial judgment and make simultaneous offers to settle. If the offers cross, they settle on the average offer; otherwise, both litigants incur an additional cost and the judgment is imposed at trial. We obtain an essentially unique Nash equilibrium and characterize its conditional trial probabilities and judgments. Some of the results are intuitive. For example, an increase in trial cost (or a decrease in the range of possible outcomes) reduces the probability of a trial. We obtain a precise nonlinear expression for the relationship. Other results reverse findings from previous literature. For example, trials are possible even when the defendant's signal indicates a higher potential judgment than the plaintiff's signal, and when trial costs are low, middling cases (rather than extreme cases) are more likely to settle. Copyright 2007, Oxford University Press.

Date: 2007
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Related works:
Working Paper: LITIGATION WITH SYMMETRIC BARGAINING AND TWO-SIDED INCOMPLETE INFORMATION (2003)
Working Paper: Litigation with Symmetric Bargaining and Two-Sided Incomplete Information (2003)
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