Introduction
Basic Issues, Notions and Notation
Players
For example, the standard assumption when there is some uncertainty in the model (perhaps about damages or liability or both) is that J will learn the truth in court and award at fair value (ie actual damages and liability will be correctly established). These issues will be discussed in the sections on timing (6) and information (7), and sometimes such possibilities are included by adding another "player" to the analysis, namely nature (N), a disinterested player whose actions affect other players in game through some probability rule.
Actions and Strategies
In general, a strategy provides a player with a complete list of actions to take at each player's decision opportunity and depends on: 1) observed actions taken by the other player(s) in the past;. A strategy could be thought of as a book, with the pages of the book corresponding to opportunities in the game for the owner of the book to decide.
Outcomes and Payoffs
Payments that are strictly monetary (for example, the transfer itself) are seen as reflecting risk-neutral behavior on the part of the player. In general, the costs incurred during negotiations are ignored, although some papers reviewed in sections 11.2 and 18 emphasize the effect of negotiation costs on settlement offers and the length of the negotiation horizon.
Timing
This is not limited to the question of whether or not P and D make choices at different points in time. The main stream of research in the strategic negotiation literature views the horizon as an infinite length; this is done to eliminate the effect of arbitrary strategic behavior at the end of the horizon.
Information
- Modeling Uncertainty
- Consistent versus Inconsistent Priors
Consider yourself one of the players in the version of the earlier card game where you can learn your cards privately. The card game examples above, in common with much of the literature on asymmetric information settlement models, involve games with consistent priorities.
Prediction
- Nash Equilibrium in Noncooperative Games
- Cooperative Solutions
As stated earlier, in an equilibrium no player can unilaterally improve his payoff by changing his share of the equilibrium strategy profile. In our particular case, there are conditions on the data for the strategic approach that guarantee that the equilibrium predicted for that model is the NBS of the associated bargaining problem.
An Example of a Model of Settlement Negotiation
- Analyzing the Case Wherein P Makes a Demand
- Analyzing the Case Wherein D Makes an Offer
- Bargaining Range and Bargaining Efficiency
All of the above, that both players are rational (i.e., P maximizes and D minimizes their respective payoffs) and the bargaining story being analyzed, is common knowledge. Note that it is not necessary to model a choice for P to go to court if her claim is rejected due to the assumption that the expected compensation exceeds the plaintiff's legal costs.
Basic Models of Settlement Bargaining
Perfect Information
Note also that the points below the line represent inefficient allocations: this is what "money left on the table" means. The point of disagreement (-(d + kD), d - kP) draws attention (note the thin lines) to the part of the feasible set that contains the assignments that satisfy the above inequalities (2) and (3): each assignment in this small triangle is individually rational for both players. Another way this boundary is referred to is that if there is something to be negotiated (ie the point of disagreement is to the left of the line) then part of the line is in between.
Imperfect Information
If D's legal costs exceed P's, P receives more from the settlement than actual compensation, reflecting his slightly stronger relative bargaining position embodied in his threat of a surplus that P and D can jointly generate if they do not go to court. A similar argument applies to P in a weaker position, with higher court costs: he settles for less than d, since kD - kP < 0.
Other Axiomatic Solutions, with an Example Drawn from Bankruptcy
From our earlier discussion of the NBS in Section 8.2, we know about Nash's third axiom ("Third, if the players agree to one outcome when a second one is also feasible, then they never agree to the second one when the first one is not feasible.”) that since “cutting off” the two triangular regions did not cut away the original solution, it is still the solution to the bargaining problem. 9 It is worth noting that this is not the only objection that some scholars have against this axiom raised, but discussion of the other objections would probably lead us too far This is problematic because, when A and B initially consider making investments in the firm, if the agreement then made to use the NBS to resolve liquidation of the business should it ever become necessary, both investors can now choose to reduce the initial investments each makes, as the use of the NBS appears to be biased towards repaying the smaller investor and the larger investor too late to simply pick up the rest.
However, in the case of our bankruptcy example with the "finished brick", the KS solution will always end up inside the downward-sloping boundary (that is, on the face of the finished side of the brick), so that each.
Perfect and Imperfect Information Models: Strategic Models for the Noncooperative Case 39
- Settlement Using Strategic Bargaining Models in The Perfect Information Case . 44
Recall that in the cooperative model, P and D were committed to finding an efficient outcome of the negotiations. In settling the settlement, each round allows P to choose to break off negotiations and go to trial. Note that in much of the preceding discussion, an implicit notion was that a player's strategy predicts the next play in the game.
The rest of this section is therefore devoted to the analysis in the infinite horizon case.
Analyses Allowing for Differences in Player Assessments Due to Private Information
- Yet More Needed Language and Concepts: Screening, Signaling, Revealing and
- Where You Start and Where You End
- One-Sided Asymmetric Information Settlement Process Models: Examples of
- Screening: A Two-Type Analysis
- Screening with Many Types
- Signaling: A Two-Type Analysis
- Signaling with Many Types
- How Robust are One-Sided Asymmetric Information Ultimatum Game Analyses? 65
- Comparing the Two-Type Models: Imperfect and Asymmetric Information
- Asymmetric Information versus Other Models of Settlement Bargaining
The levels are known and D's estimate of p is the probability that the lower value is the true damage level. This latest offering is said to control the types; note that the offer results in the disclosure of private information. In the imperfect information version of the D-proposer's ultimatum game, D's optimal offer is ED(d) - kP, P's concession limit under imperfect information.
There are technical reasons (refinements) mentioned earlier regarding the extensions of notions of rationality that support this choice, but another motivation is that the smallest admissible r, rD(sH), is the most efficient of the possible choices. While the principle used above extends to the example of a continuum of private values. The extent of inefficiency is related to the nature of information distribution, the range of possible values that private data can take on, and the amount of legal costs.
Overview
In Yildiz (2003), negotiators play a modified version of Rubinstein's game: at each stage, nature chooses who will make an offer in each period, so that strict turn-taking is not required. Making an offer involves the ability to exploit the rent by forcing the other negotiator to accept or face a reduced pie in the next period. However, as Yildiz (2004) shows, learning over time about the probability of being the next to bid can lead to a delay.
Second, the selection to be discussed is a subset of existing published work: it is not intended to be comprehensive.
Players
- Attorneys
- Judges and Juries
- Multiple Litigants
1 - α of the lawyer's expected litigation costs based on his actual decisions (with the lawyer bearing α share of these costs). Che finds that a class must include both high and low injury plaintiffs; in addition, some high-injury plaintiffs and some low-injury plaintiffs must be removed from the class. Essentially, when D settles with a given plaintiff, it drops out of the lawsuit, increasing costs per plaintiff for those remaining in the class.
This use of an MFN by the early settler leaves D's equilibrium payoff unchanged, while benefiting the early claimant at the expense of the later claimant.
Actions and Strategies
- Credibility of Proceeding to Trial Should Negotiations Fail
- Filing a Claim
- Counterclaims
Bebchuk shows how court costs and the probabilistic determination of the possible levels of damages affect settlement offers and rates. The uninformed party P is assumed to make a series of settlement demands, each of which involves reducing more of the total litigation costs;. Using an imperfect information model, Landes (1994) shows that counterclaims (suits filed by D against P as part of the existing action by P against D, rather than filed as a separate lawsuit) do not always P does not reduce his incentive to sue, and may (by raising the stakes in the game) actually increase the likelihood that the case will go to trial.
Under these conditions, the counterclaim reduces the size of the settlement limit (and possibly eliminates it).
Outcomes and Payoffs
- Risk Aversion
- Offer-Based Fee Shifting Rules
- Damage Awards
- Other Payoffs: Plea Bargaining
They note that the optimal procedure includes an upper limit on the allowable level of settlement (excessive settlement undermines deterrence); Both screening and signaling versions of the model are considered; in both versions, they find that the shared allocation law results in a higher probability of settlement and a lower expected settlement amount for a given case. Because the types of defendants are not fully screened, it is optimal for P to consider only a fraction of the cases in which plea bargaining failed.
Here P makes simultaneous bids to each D so as to maximize the sum of the expected penalties of both Ds.
Timing
Kessler notes that approximately half of the states impose prejudgment interest on the theory that the defendant cannot thereby benefit by delaying settlement. However, if the interest rate is equal to the parties' common discount rate, then both P and D are indifferent about the timing of repayment (and otherwise at least one party may have an incentive to delay even though, under full information, the settlement occurs immediately and the effect of the prejudgment interest is simply to shift the settlement amount). If there is private information, then bias interest can result in more delay, as it increases the mean and variance of the stock.
He finds that prejudgment interest laws increase settlement delay (an unintended consequence), as do measures of court backlog (this suggests a deadline effect, as shorter backlogs indicate shorter time to trial, i.e., an earlier deadline) and the use of comparative negligence (an indicator of case complexity ).
Information
- Acquiring Information from the Other Player: Discovery and Disclosure
- Acquiring Information from Experts
- Procedures for Moderating the Effects of Private Information
Kessler's empirical analysis of US automobile bodily injury claims also includes other attributes of prejudgment interest statutes, which may have independent effects on settlement delay. The rest of the silent types will settle, as will those whose claim is even greater and verifiable. One of the main results is to propose a distribution of detection costs in order to provide barriers to abuse by each player.
If the supply exceeds the demand, then the escrow agent imposes the average of the demand and supply as the settlement amount.
Conclusions
FENN, Paul og RICKMAN, Neil (2001), "Asymmetric Information and the Settlement of Insurance Claims," The Journal of Risk and Insurance. FRIEDMAN, Daniel og WITTMAN, Donald (2006), "Liitigation with Symmetric Bargaining and Two-Sided Incomplete Information," Journal of Law, Economics, and Organization Settlement of Litigation," The New Palgrave Dictionary of Law and Economics, red. Mitchell og CHE, Yeon-Koo (1991), "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics A Note on Settlements under the Contingent Fee Method of Compensating Lawyers," International Review of Law and Economics.
WALDFOGEL, Joel (1998), "Reconciling Asymmetric Information and Divergence Expectations Theories of Litigation," Journal of Legal Studies.
