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Optimal Litigation Strategies with Signaling and Screening

  • Economics


INSTITUT NATIONAL DE LA STATISTIQUE ET DES ETUDES ECONOMIQUES Série des Documents de Travail du CREST (Centre de Recherche en Economie et Statistique) n° 2008-16 Optimal Litigation Strategies with Signaling and Screening* Ph. CHONÉ1 L. LINNEMER2 Les documents de travail ne reflètent pas la position de l'INSEE et n'engagent que leurs auteurs. Working papers do not reflect the position of INSEE but only the views of the authors. * We are grateful to seminar participants at the 2007 CESifo Area Conference on Applied Microeconomics, the 22nd Meeting of the European Economic Association in Budapest, the 2007 ASSET Meeting in Padova as well as to Philippe Février and Thibaud Vergé for insightful comments. 1 CREST-LEI, 28 rue des Saints-Pères, 75007 Paris. Email : [email protected] 2 CREST-LEI, 28 rue des Saints-Pères, 75007 Paris. Email : [email protected] (contact author) Abstract This paper examines the strategic effects of case preparation in litigation. Specifi- cally, it shows how the pretrial efforts incurred by one party may alter its adversary’s incentives to settle. We build a sequential game with one-sided asymmetric information where the informed party first decides to invest, or not, in case preparation, and the un- informed party then makes a settlement offer. Overinvestment, or bluff, always prevails in equilibrium: with positive probability, plaintiffs with weak cases take a chance on investing, and regret it in case of trial. Furthermore, due to the endogenous investment decision, the probability of trial may (locally) decrease with case strength. Overinvest- ment generates inefficient preparation costs, but may trigger more settlements, thereby reducing trial costs. Keywords: Case preparation, Settlement, Trial, signaling. JEL Classification: K410 Résumé Cet article analyse les effets stratégiques de la prépar

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