Litigation and Settlement under Imperfect Information

Abstract

A model of parties' litigation and settlement decisions under imperfect information is studied. The model shows how informational asymmetry influences parties' decisions, and how it might lead to parties' failure to settle. The model is used to identify how the likelihood of settlement and the settlement amount are shaped by various factors--the size of the amount at stake, the magnitude of the parties' litigation costs, and the nature of the parties' information. The model is also used to examine how the likelihood of settlement is affected by various legal rules, such as those governing the allocation of litigation costs.