Markets, Public Policy and Law
Author: William Samuelson
This paper considers the incidence of out-of-court negotiated settlements versus adjudicated outcomes as predicted by a number of game-theoretic models. A number of questions are addressed: How do varying offer and acceptance methods effect the terms of out-of-court settlements? In favor of which side? Which kinds of cases settle and which go to court? How does the expected court outcome (including legal costs and possibly reputation costs) affect the terms and likelihood of an out-of-court settlement? How does private information about the case merits held by one or more sides affect player strategies and outcomes? Among other results, we show that the strategic behavior of the disputants combined with asymmetric information about the value of the case constitutes a road block to achieving a first-best, ideal settlement mechanism. There is an inevitable trade-off between efficiency and equity. In equilibrium, out-of-court settlements can save all or some part of the costs of going to court, but are unable to mimic perfectly those court outcomes.