Sinking Costs to Force or Deter Settlement

68 Pages Posted: 26 Jun 2014 Last revised: 6 Apr 2017

Date Written: June 24, 2014

Abstract

This paper develops a simple but general model of negative-expected-value (NEV) suit and settlement given symmetric information. Plaintiffs and defendants can choose when and to what extent they sink litigation costs through the use of retainers and detailed pleading. I demonstrate sharp asymmetries in the ability of plaintiffs and defendants to use sunk costs strategically to obtain or deter nuisance-value settlements. The model accounts for the roles of the merits, litigation costs, and bargaining power; incorporates complaints and answers for which parties' investments in pleading detail are endogenously determined; permits strategic default by the defendant; and nests several existing models of NEV litigation as special cases. It generates testable, counterintuitive, empirical predictions and facilitates normative analysis. For example, the model predicts that plausibility pleading standards will have modest effects in deterring low-merit suits but may be harmful to plaintiffs and defendants settling stronger cases.

Note: Previously circulated as "Nuisance Suits".

Keywords: litigation, settlement, pleading, negative expected value suits

JEL Classification: K00, K41, D82

Suggested Citation

Hubbard, William H. J., Sinking Costs to Force or Deter Settlement (June 24, 2014). Published version: Forthcoming, 32 J. L., Econ. & Org. (2016), U of Chicago, Public Law Working Paper No. 479, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 691, Available at SSRN: https://ssrn.com/abstract=2458685 or http://dx.doi.org/10.2139/ssrn.2458685

William H. J. Hubbard (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-8999 (Phone)

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