Litigation with Symmetric Bargaining and Two-Sided Incomplete Information

Abstract

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 NE and characterize its conditional trial probabilities and judgments. Some of the results are intuitive, e.g., an increase in trial cost (or a decrease in the range of possible outcomes) reduces the probability of a trial. 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, the middling cases (rather than the extreme cases) are more likely to settle.

Litigation and the timing of settlement: evidence from commercial disputes

“…However, the model does not explain the underlying reason for parties' divergent beliefs and does not clarify the structure of settlement bargaining. Accordingly, more recent literature (see, e.g., P'ng 1983, Bebchuk 1984, Nalebuff 1987, Reinganum and Wilde 1986, Spier 1992, Daughety and Reinganum 1994, Friedman and Wittman 2007 emphasizes informational asymmetries as a source of parties' divergent expectations and explicitly models settlement bargaining.…”

Litigation and settlement under judicial agency

“…We let c p > 0 and c d > 0 denote these costs for the plaintiff and the defendant, respectively. 9 Due to trial costs, the parties have some interest in settling the issue through private negotiations. These negotiations can take many forms and the outcome may depend on the bargaining protocol assumed, especially when the parties have asymmetric information.…”

“…Our main results would go through with minor modifications if the parties were instead risk-averse. 9 These costs are incurred regardless of the trial's outcome. 10 Spier (1992) considers a finitely repeated version of this model and shows that if all costs are borne at trial, then the equilibrium outcome is equivalent to the single-offer model.…”

“…Both models study ultimatum bargaining games in which either the plaintiff or the defendant has private information about damages or liability. For models with two-sided asymmetric information, see Friedman and Wittman (2006) and Daughety and Reinganum (1994). 2 In order to simplify the analysis, we assume that the litigants have a passive role at the trial.…”

Real Estate Pricing under Two-Sided Asymmetric Information

“…Some existing work has studied the propensity to settle a lawsuit when both sides have private information about their likelihood of success (Friedman and Wittman (2007) [1], Daughety and Reinganum (1994) [2]), bargaining over labor disputes (Kennan and Wilson (1993) [3]), or the setting of point spreads in gambling markets (Sandford and Shea (2013 [4]), Ottaviani and Sorenson (2006) [5], and Steele and Zidek (1980) [6]). This paper extends the framework of Sandford and Shea (2013) [4], which finds the unexpected result that bookmakers do not optimally set gambling lines so that each side is equally likely to win when both the bookmaker and gambler have private information, to a real estate market, in which buyers and sellers negotiate over the price of an asset of uncertain value 1 .…”