Against Compromise: A Mechanism Design Approach

Posted: 12 Jul 2005

See all articles by Alon Klement

Alon Klement

Buchman Faculty of Law, Tel Aviv University

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

A risk-neutral plaintiff sues a risk-neutral defendant for damages that are normalized to one. The defendant knows whether she is liable or not, but the plaintiff does not. We ask what are the settlement procedures and fee-shifting rules (which, together, we call a mechanism) that minimize the rate of litigation subject to maintaining deterrence. Two main results are presented. The first is a characterization of an upper bound on the rate of settlement that is consistent with maintaining deterrence. This upper bound is shown to be independent of the litigants' litigation cost. It is shown that any mechanism that attains this bound must employ the English fee-shifting rule (according to which all litigation costs are shifted to the loser in the trial). The second result describes a simple practicable mechanism that attains this upper bound. We discuss our results in the context of recent legal reforms in the United States and United Kingdom.

Keywords: Litigation, settlement, fee-shifting, pleadings, deterrence, discovery

JEL Classification: D82, K41

Suggested Citation

Klement, Alon and Neeman, Zvika, Against Compromise: A Mechanism Design Approach. The Journal of Law, Economics, and Organization, Vol. 21, No. 2, pp. 285-314, 2005, Available at SSRN: https://ssrn.com/abstract=754864

Alon Klement (Contact Author)

Buchman Faculty of Law, Tel Aviv University ( email )

Tel Aviv
Israel

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~zvika/

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
724
PlumX Metrics