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Credible discovery, settlement, and negative expected value suits
Author(s) -
Schwartz Warren F.,
Wickelgren Abraham L.
Publication year - 2009
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2009.00082.x
Subject(s) - credibility , settlement (finance) , plaintiff , price discovery , constraint (computer aided design) , value (mathematics) , human settlement , incentive , information asymmetry , scientific discovery , business , law and economics , computer science , economics , law , microeconomics , geography , engineering , finance , political science , mechanical engineering , archaeology , machine learning , payment , futures contract , psychology , cognitive science
We introduce discovery into a model of settlement and negative expected value (NEV) suits under asymmetric information. The option to conduct discovery has several important effects. First, because discovery is cheaper than litigation, it reduces the defendant's incentive to settle under asymmetric information. Second, discovery must be credible. Because discovery is more valuable the greater the uncertainty it resolves, this introduces a credibility constraint on pre‐discovery settlement offers. This can further reduce the probability and size of a defendant's pre‐discovery settlement offer. Lastly, discovery reduces the ability of NEV plaintiffs to use asymmetric information to extract significant settlements from defendants.