TY - JOUR
T1 - Threats to sue and cost divisibility under asymmetric information
AU - Klement, Alon
N1 - Funding Information:
I am grateful to Lucian Bebchuk and Zvika Neeman for their help. I also wish to thank Omri Ben Shahar, Ofer Grosskopf, Louis Kaplow, Steven Shavell, Kathryn Spier, two anonymous referees, and participants in the Law and Economics seminar in Harvard Law School for helpful comments. For financial support I am grateful to the John M. Olin Center for Law, Economics, and Business at Harvard Law School.
PY - 2003/9
Y1 - 2003/9
N2 - The early literature on litigation and settlement assumed that a plaintiff's threat to litigate is credible only when her litigation value-the difference between the expected judgment and her litigation costs-is positive. More recently, however, Bebchuk (1996) has suggested that even if the plaintiff's litigation value is negative, divisibility of her litigation costs may render credibility to her threat to sue. We show that Bebchuk's result is limited to environments where there is relatively little asymmetric information. When a defendant holds private information concerning his liability he can deter small value suits by engaging in a stonewalling strategy, consistently refusing to settle, even if the plaintiff's costs are very finely divided.
AB - The early literature on litigation and settlement assumed that a plaintiff's threat to litigate is credible only when her litigation value-the difference between the expected judgment and her litigation costs-is positive. More recently, however, Bebchuk (1996) has suggested that even if the plaintiff's litigation value is negative, divisibility of her litigation costs may render credibility to her threat to sue. We show that Bebchuk's result is limited to environments where there is relatively little asymmetric information. When a defendant holds private information concerning his liability he can deter small value suits by engaging in a stonewalling strategy, consistently refusing to settle, even if the plaintiff's costs are very finely divided.
KW - Asymmetric information
KW - Defendant
KW - Litigation
KW - Negative expected value
KW - Settlement
UR - http://www.scopus.com/inward/record.url?scp=0345255612&partnerID=8YFLogxK
U2 - 10.1016/j.irle.2003.09.003
DO - 10.1016/j.irle.2003.09.003
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AN - SCOPUS:0345255612
SN - 0144-8188
VL - 23
SP - 261
EP - 272
JO - International Review of Law and Economics
JF - International Review of Law and Economics
IS - 3
ER -