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Settlements out of Court: Efficiency and Equity

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  • William F. Samuelson

    (Boston University)

Abstract

This paper considers a model of out-of-court settlement negotiations in which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will fail to attain negotiated settlements (at least some of the time). Second, there is a fundamental tradeoff between settlement efficiency and equity. Increasing the frequency of out-of-court settlements inevitably means adopting settlements that are less responsive to the true merits of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average court expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court costs results in a fall in the frequency of litigation.

Suggested Citation

  • William F. Samuelson, 1998. "Settlements out of Court: Efficiency and Equity," Group Decision and Negotiation, Springer, vol. 7(2), pages 157-177, March.
    • Handle: RePEc:spr:grdene:v:7:y:1998:i:2:d:10.1023_a:1008602608852
    DOI: 10.1023/A:1008602608852
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    References listed on IDEAS

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    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. William M. Landes, 1974. "An Economic Analysis of the Courts," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 164-214, National Bureau of Economic Research, Inc.
    3. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    4. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-1097, September.
    5. Urs Schweizer, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 163-177.
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