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Limited Liability, Liability Cap, and Pretrial Negotiation

Author

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  • Hee Keun Jeong
  • Jeong-Yoo Kim

Abstract

We examine how the possibility of limited liability will affect the trial likelihood when the plaintiff is uninformed of whether the defendant is financially constrained or not. The financially constrained defendant has a smaller incentive to settle because he has less to lose in court, and thus makes a lower settlement offer. Therefore, there is a separating equilibrium in which only the poor defendant goes to court, while the rich defendant makes a high offer that will be accepted for sure. We show that the liability cap restricting the judgment amount in court can increase the settlement rate by making both types of defendant solvent.

Suggested Citation

  • Hee Keun Jeong & Jeong-Yoo Kim, 2019. "Limited Liability, Liability Cap, and Pretrial Negotiation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 175(4), pages 641-663.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2019-0027
    DOI: 10.1628/jite-2019-0027
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    Cited by:

    1. Giorgio Rampa & Margherita Saraceno, 2023. "Conjectures and underpricing in repeated mass disputes with heterogeneous plaintiffs," Journal of Economics, Springer, vol. 139(1), pages 1-32, June.

    More about this item

    Keywords

    pretrial negotiation; settlement; limited liability; liability cap; signal;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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