Preferences, Information and Settlement Failure

Abstract

Asymmetric information on preferences is a potentially important explanation of bargaining failure. Preferences are not directly observable and information about preferences may be difficult to credibly establish to a bargaining partner. Unobserved preferences which may be relevant for pretrial bargaining include the degree of risk aversion, the degree of litigiousness, and a taste for fairness. These contrast with fact based explanations such as asymmetric information on the probability of a finding for the plaintiff at trial or on the extent of the plaintiff's damages. In this paper, we show that there is an important difference between informational asymmetries which are fact based and those which are preference based. In particular, with a fact based asymmetry, the standard bargaining model predicts trials regardless of whether the uninformed party or the informed party makes the offer. By contrast, under the preference based explanation, disputes are only predicted in the model in which the uninformed party makes the offer. We illustrate this point in a simple model of pretrial bargaining.

Keywords: Pretrial Bargaining, Civil Litigation, Asymmetric Information, Risk Preferences

JEL Classification: D82, C78, K4