Costly Pretrial Agreements
Settling a legal dispute involves some costs that the parties have to incur ex ante for the pretrial negotiation and possible agreement to become feasible. Even in a full-information world, if the distribution of these costs is sufficiently mismatched with the distribution of the parties’ bargaining powers, a pretrial agreement may never be reached even though litigation is overall wasteful. Our results shed light on two key issues. First, a plaintiff may initiate a lawsuit even though the parties fully anticipate that it will be settled out of court. Second, the likelihood that a given lawsuit goes to trial is unaffected by how trial costs are distributed among the litigants. The choice of fee-shifting rule can affect only whether the plaintiff files a lawsuit in the first place. It does not affect whether it is settled before trial or litigated.
Anderlini, Luca; Felli, Leonardo; and Immordino, Giovanni
"Costly Pretrial Agreements,"
Journal of Legal Studies: Vol. 48:
1, Article 5.
Available at: https://chicagounbound.uchicago.edu/jls/vol48/iss1/5