Sinking Costs to Force or Deter Settlement

William H.J. Hubbard

The Journal of Law, Economics, and Organization, 2016, vol. 32, issue 3, 545-585

Abstract: This article develops a simple but general model of suit and settlement given symmetric information. Plaintiffs and defendants can choose when and to what extent they sink litigation costs through the use of retainers and detailed pleading. I demonstrate sharp asymmetries in the ability of plaintiffs and defendants to use sunk costs strategically to obtain or deter nuisance-value settlements. The model accounts for the roles of the merits, litigation costs, and bargaining power; incorporates complaints and answers for which parties’ investments in pleading detail are endogenously determined; permits strategic default by the defendant; and nests several existing models of negative-expected-value litigation as special cases. It generates testable, counterintuitive, empirical predictions, and facilitates normative analysis. For example, the model predicts that plausibility pleading standards will have modest effects in deterring low-merit suits but may be harmful to plaintiffs and defendants settling stronger cases. (JEL K41)

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1093/jleo/ewv029 (application/pdf)
Access to full text is restricted to subscribers.

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:32:y:2016:i:3:p:545-585.

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 ().