• Selected
• Entire List

Abstract:
We examine the effect of the "split-award" tort reform (wherein the State takes a share of a punitive damages award) on equilibrium settlements and the incentives to go to trial. Using both signaling and screening models of settlement negotiations, we find that the equilibrium settlement is increasing in the likelihood of the defendant being found liable, in the size of both the compensatory and punitive damages, and in the share of the punitive damages award that the plaintiff may keep. We also find that increases in the same attributes (except for the compensatory damages award) increase the likelihood of a case proceeding to trial. Thus, split-award statutes simultaneously lower settlement amounts and the likelihood of trial, as both parties act to cut out the State (since the statutes only apply to awards at trial).

We then develop an analysis of the revenue that split-award statutes could generate, conditioned on the allocation of a punitive damages award between the plaintiff, his lawyer and the State. We construct a symmetric random proposer model (a composite of the signaling and screening models) and find the revenue-maximizing share for each state currently using a split-award statute with a mandated rate. We find that (for all states but one) the predicted state's share is approximately 50% (for the remaining state, the revenue-maximizing share should be approximately 66%). These results are robust to variations in economic parameters and to whether the state's share is gross or net of the plaintiff's attorney's fee.

One surprising result is that these statutes do not deter filings and that their use can actually encourage plaintiffs' attorneys to accept and pursue weaker cases than would have been brought absent the statute. Finally, we use our results (along with information about the evidentiary standard employed, the allocation scheme used and the presence or absence of caps imposed on damages awards) to infer the likely motivation for passing a split-award statute for six states of interest. We find that policies in Indiana and Oregon are more consistent with a primary motivation of deterrence reduction while policies in Georgia, Iowa, Utah and Missouri seem to be more consistent with a primary motivation of revenue generation.

Abstract:
We examine a heterogenous goods duopoly model, wherein governments simultaneously and noncooperatively choose whether or not to provide subsidies for their firms and then firms noncooperatively choose output levels, either sequentially or simultaneously. We find that government trade policy and market structure are interdependent. First, the trade regime alters traditional firm preferences over sequential versus simultaneous play. Second, different market structures influence governments' preferences about free trade versus subsidies. Further, if one of the firms is a potential leader, allowing for endogenous market structure generates equilibrium outcomes that sometimes reinforce, and sometimes counter, traditional results in the strategic trade literature.

Abstract:
We explore the interplay of market structure and government trade policy in the context of a heterogenous goods duopoly model (allowing for goods to be substitutes or complements) wherein governments simultaneously and noncooperatively choose whether or not to provide subsidies for their firms and then firms noncooperatively choose output levels, either sequentially (i.e., in a Stackelberg leader-follower model) or simultaneously (i.e., in a Cournot-Nash model). We focus on competition in quantities but also provide results when firms compete in prices.

In both the quantity and price models we further allow for endogenous market structure by considering two game forms wherein one of the firms, a potential leader, can choose to lead or not lead (play Cournot).

We find that government trade policy and market structure can interact. First, the trade regime can alter traditional firm preferences over sequential versus simultaneous play. Second, different market structures can influence governments' preferences about free trade versus subsidies. Further, if one of the firms is a potential leader, allowing for endogenous market structure generates equilibrium outcomes that sometime reinforce, and sometimes counter, received results in the extant strategic trade literature. For example, when firms compete in quantities, endogenous market structure results in Cournot-Nash competition, but competition in prices results in a leader-follower structure.

Market Structure, Strategic International Trade

Abstract:
We model appeals courts as Bayesian decision-makers with private information about a supreme court's interpretation of the law; each court also observes the previous decisions of other appeals courts in similar cases. Such 'persuasive influence' can cause 'herding' behavior by later appeals courts as decisions progressively rely more on previous decisions and less on a court's private information. We provide an example drawn from a recent U.S. Supreme Court decision finding unconstitutional a basic provision of a law previously found constitutional by six Circuit Courts. Herding on the wrong decision may remain uncorrected, since review of harmonious decisions is rare.

Abstract:
We examine the interplay of imperfect competition and incomplete information in the context of price competition among firms producing horizontally- and vertically-differentiated substitute products. We find that incomplete information about vertical quality (e.g., consumer satisfaction), which is signaled via price, softens price competition, and that imperfect competition can reduce the degree to which firms may distort their prices to signal their types (relative to what a monopolist would do). We show that low-quality firms always prefer playing the incomplete information game to the full-information analog: their prices are higher and so are their profits. Moreover, for "high-value" markets, if the proportion of high-quality firms is high enough, high-quality firms also prefer incomplete information to full information. We find conditions such that an increase in the loss to consumers associated with consuming the low-quality product may perversely benefit low-quality firms. We discuss the implications of our analysis for recent tort reform proposals, incentives for the diffusion of general innovation to product-specific improvements, and licensing in markets with uncertain quality.

Imperfect competition, quality, signaling, oligopoly

Abstract:
We draw together concepts from political science, law, and economics to model discretionary actions by agents in a weak hierarchical system, wherein agents at a higher level cannot directly discipline those at a lower level. In particular, we model the decision by an appeals court judge to communicate information to justices on a supreme court (via a written dissent) that a case is worthy of reconsideration, and discretionary decisions by justices on that supreme court to choose whether to formally review the case. In our model, judges and justices receive utility both from the outcome of the case in question and from the breadth of application of the outcome to jurisdictions besides the original source of the case (that is, the precedential value of the case). Action is costly for judges and for justices: for the appeals court judge, producing the dissenting opinion involves effort and may even preclude being able to so promote other cases; for the justices on the supreme court, there are too many such cases to consider, so the decision to review a case implies foregone opportunities to review other cases, cases through which they could also influence the evolution of the law. One very plausible equilibrium in our model predicts that an appeals court judge will find it valuable to communicate information to like-minded supreme court justices. However, a more unexpected type of equilibrium can exist that can best be summarized as an equilibrium with "strange bedfellows": a judge with a particular ideological orientation may choose to communicate and influence a justice (or justices) with different ideological views in order to persuade the justice(s) to vote to review the case in question. Furthermore, we show that by setting a high hurdle for discretionary review, the supreme court justices can capitalize on the desire of appeals court judges to influence law, thereby encouraging enhanced informational effort by the appeals court judges: judges act as screeners of the cases most likely to be of interest to justices.

Discretionary Review, Dissenting Opinions, Judicial Dissent, Applications of Game Theory to Judicial Processes

Abstract:
This paper uses axiomatic and Bayesian methods to model information and decisions in a hierarchical judicial system. We use a set of axioms to summarize decision-making at the trial level, where the axioms represent the desirable properties of judicial decisions that rules of evidence, procedure, precedent and higher court review impose. A family of one-parameter functions provides the unique continuous solution to the axioms. The parameter is then interpreted as the type space for the appeals stage. In this stage the appellant (the losing defendant from the trial) and the appeals court each receive private signals of a yet superior court's value of the parameter. The defendant chooses whether or not to appeal the lower court's decision and the appeals court is able to use that action to improve its estimate of the superior court's preferred value of the parameter. The equilibrium involves a cutoff value of the defendant's signal, such that only those with signals at or below the cutoff would choose to appeal their loss.

Higher awards at trial, or higher costs of appeal, affect the overall equilibrium by changing the cutoff value used to make the decision to appeal (higher awards increase the cutoff while higher costs decrease it). An increased evidentiary standard also increases the cutoff, resulting in an increased caseload for the appeals court. These changes not only affect the marginal type, but the inframarginal type, too. Finally, if a decrease in appeals court resources results in a reduction in the informativeness of the appeals court's signal, this can lead to decreased informativeness of the appellant's decision (as increased reliance by the appeals court on this information source induces adverse strategic behavior), with the result that the equilibrium relies only on the prior distribution of the superior court's preferred value of the parameter.

Abstract:
We briefly review two basic models of settlement bargaining based on concepts from information economics and game theory. We then discuss how these models have been generalized to address issues that arise when there are more than two litigants with related cases. Linkages between cases can arise due to exogenous factors such as correlated culpability or damages, or they can be generated by discretionary choices on the part of the litigants themselves or by legal doctrine and rules of procedure.

Multiple litigants, externalities, asymmetric information

Abstract:
In this paper we examine the nexus between product markets and the legal system. We examine a model wherein oligopolists produce differentiated products that also have a safety attribute. Consumption of these products may lead to harm (to consumers and/or third parties), lawsuits, and compensation, either via settlement or trial. Firm-level costs reflect both R&D and production activities, as well as liability-related costs. Compensation is incomplete, both because of inefficiencies in the bargaining process and (possibly) because of statutorily-established limits on awards. We compare the market equilibrium safety effort and output levels to what a planner would choose. We consider two planners, one of whom is able to set safety standards, but takes the market equilibrium output as given, and one of whom can control both safety effort and output. We argue that the former type of planner is the better representative of what the tort system might do if faced with deciding upon a safety effort standard.

We examine two measures of competitiveness: The number of firms, and the degree of substitutability of the products. Holding substitutability constant, an increase in the number of firms always reduces equilibrium safety effort. On the other hand, holding the number of firms constant, increasing substitutability first decreases, but ultimately increases, the equilibrium safety effort. Non-cooperative firms under-provide safety effort (relative to the restricted social planner's preferred level) when the products are relatively poor substitutes. However, when the products are sufficiently good substitutes, the non-cooperative firms over-provide safety effort. Moreover, the more firms there are in the industry, the less substitutable their products need to be in order for the equilibrium to result in over-provision of safety effort. Under-provision of safety becomes more typical as the rate of third-party exposure increases or as the amount of third-party uncompensated losses increases. Finally, we use the settlement subgame to examine the effects of alternative tort reform policies on the equilibrium provision of safety and welfare. In the presence of third-party victims, welfare can be increased even though changes in such policies may increase expected trial costs.

oligopoly, torts, safety, liability, social optimality

Abstract:
The adversarial provision of evidence is modeled as a game in which two parties engage in strategic sequential search. An axiomatic approach is used to characterize a court's decision based on the evidence provided. Although this process treats the evidence submissions in an unbiased way, the equilibrium outcome may still exhibit bias. Bias arises from differences in the cost of sampling or asymmetry in the sampling distribution. In a multi-stage model, a pro-defendant bias arises in the first stage from a divergence between the parties' stakes. Finally, the adversarial process generates additional costs which screen out some otherwise meritorious cases.

Abstract:
This survey of the modeling of pretrial settlement bargaining organizes current main themes and recent developments. The basic concepts used are outlined as core models and then several variations on these core models are discussed. The focus is on articles that emphasize formal models of settlement negotiation and the presentation in the survey is organized in game-theoretic terms, this now being the principal tool employed by analyses in this area, but the discussion is aimed at the not-terribly-technical non-specialist. The survey also illustrates some of the basic notions and assumptions of information economics and of (cooperative and noncooperative) game theory.

Settlement, Bargaining, Negotiation, Litigation

Abstract:
We provide a simple incomplete-information model wherein an initially uninformed plaintiff makes a menu of settlement demands (one of which involves confidentiality) of the informed defendant. The defendant is informed about both his culpability in the harm suffered by the current plaintiff and the existence of other plaintiffs. The possibility that there are other plaintiffs the defendant might face improves the current plaintiff's bargaining position, as the likelihood of follow-on suits depends upon the visibility of the outcome of the case. For this reason, the defendant may be willing to be "hush money."

Abstract:
Models of bargaining under incomplete information usually focus on the revelation of information between the participants in the existing negotiation. However, what if one of the participants wants the details (or the existence) of the negotiations to be kept secret? In such circumstances bargaining involves multiple issues: the original object of the bargain and the agreement to keep a secret.

A good example of this is pretrial settlement bargaining. We provide a simple incomplete information model wherein an initially uninformed plaintiff makes a menu of settlement demands (one of which involves sealing the settlement) of the informed defendant. Information here is multidimensional in that the defendant is informed both about his culpability in the harm suffered by the current plaintiff as well as the existence of other plaintiffs. It is the possibility that there are other plaintiffs that the defendant might face that improves the current plaintiff's bargaining position, as the likelihood of follow-on suits is dependent upon the visibility of the outcome of the current case. It is for this reason that the defendant may be willing to pay "hush money."

Abstract:
Firms communicate product quality attributes to consumers through a variety of channels, such as pricing, advertising, releases of research reports and test results, or warranties and returns policies. The conceptualization of the economics of such communication is that it takes on one of two alternative forms when quality is exogenous: 1) disclosure of quality through a credible direct claim; 2) signaling of quality via producer actions that influence buyers' beliefs about quality. In general, these two literatures have ignored one-another. In this paper we argue that disclosure and signaling are two sides of a coin and that firms should be viewed as choosing which means of communication they will employ. Moreover, we show that integration of these two alternatives leads to a number of new implications about disclosure, signaling, firm preferences over type, and the social efficiency of the channel of communication employed.

disclosure, signaling, quality, efficiency

Abstract:
"Most-favored-nation" (hereafter, MFN) clauses have been used in analyses of international trade, durable goods monopoly pricing, and franchise contracting to address a repeat player's time-inconsistency problem. Recent work by Spier (forthcoming and 2002) has extended this perspective to the settlements of litigation by (for example) one defendant with a collection of plaintiffs.

We examine a different motivation for the use of MFNs in settlement bargaining. We argue that a non-repeat player can use an MFN to extend her reach into subsequent bargaining games. That is, an early-bargaining plaintiff can use an MFN to modify the subsequent bargaining game between the defendant and a later-bargaining plaintiff in a manner that improves the early plaintiff's payoff. Moreover, we will identify two routes through which this improvement is achieved. The obvious route is that, if the MFN is triggered by the later settlement, the early plaintiff receives an additional payment. The less obvious route is that the early plaintiff's incentives for information-revelation can be enhanced by the potential for a future payment, so that the defendant can resort to trial on a less-frequent basis. Using a signaling model, we find that the repeat player (the defendant) is indifferent about the MFN, while the later plaintiff is always worse off when an MFN constrains her settlement bargaining with the defendant. Although MFNs can never provide a Pareto improvement in this model, we demonstrate that plausible circumstances exist under which total surplus is increased by an MFN.

Settlement Bargaining, Signaling, Most-Favored-Nation Clauses

Abstract:
We consider the formation and legal protection of secret agreements by analyzing a negotiated settlement between a harmed plaintiff and a culpable defendant that seeks to disenfranchise a second harmed plaintiff by keeping the existence (and details) of the instant settlement secret. This is done so as to reduce the likelihood of the second plaintiff suing the defendant for damages or, failing that, to reduce the losses incurred by the defendant in the second suit. Such agreements happen every day and are generally legal, but are they socially optimal? Formally, we consider a sequence of incomplete information bargaining games wherein uninformed plaintiffs make demands of the informed defendant, with the defendant and the first plaintiff recognizing that their actions in the first case may convey information about the defendant's culpability to the second plaintiff. We then use the results of the analysis to provide insight as to when the law should prohibit or permit confidential agreements.

We find that, even though early plaintiffs prefer permitting confidentiality and later plaintiffs prefer prohibiting it, the average plaintiff prefers prohibition. We also show that defendants always prefer that confidentiality be permitted. When role-interim decisions (that is, decisions made when agents know whether they are likely to be plaintiffs or defendants) have no (or small) adverse welfare consequences, society would (ex ante) prefer permitting confidential settlements. However, if agents know their roles, then this conflict of preferences can mean reduced consumer demand due to perceived incentives for firms to reduce care and due to the expectation of undercompensation for harms suffered. This can lead to further reduced care and provide reduced incentives to innovate. Furthermore, confidentiality potentially biases perceived reputations of firms, potentially leading consumers to avoid trade due to concern for adverse selection and moral hazard. We also show how this analysis can systematically inform the exercise of judicial discretion with regard to such agreements.

Abstract:
We employ a simple two-period model to show that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average product safety than that which would be produced if a firm were committed to openness. Moreover, confidentiality can even lead to declining average product safety over time. We also show that a rational risk-neutral consumer's response to a market environment, wherein a firm engages in confidential settlement agreements, may be to reduce demand. We discuss how firm profitability is influenced by the decision to have open or confidential settlements; all else equal, a firm following a policy of openness will pay higher equilibrium wages and incur higher training costs, though product demand will not be diminished (as it may be for a firm employing confidentiality). Further, we characterize the choice of regime, providing conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm will choose to pay for auditing and eschew confidentiality.

Abstract:
How does the need to signal quality through price affect equilibrium pricing and profits, when a firm faces a similarly-situated rival? In this paper, we provide a model of non-cooperative signaling by two firms that compete over a continuum of consumers. We assume "universal incomplete information;" that is, each market participant has some private information: each consumer has private information about the intensity of her preferences for the firms' respective products and each firm has private information about its own product's quality. We characterize a symmetric separating equilibrium in which each firm's price reveals its respective product quality.

We focus mainly on a model in which the quality attribute is safety (so that the legal system is brought into play) and quality is unobservable due to the use of confidential settlements; a particular specification of parameters yields a common model from the industrial organization literature in which quality is interpreted as the probability that a consumer will find the good satisfactory. We show that the equilibrium prices, the difference between those prices, the associated outputs, and profits are all increasing functions of the ex ante probability of high safety. When quality is interpreted as consumer satisfaction, unobservable quality causes all prices to be distorted upward, and lowers average quality and ex ante expected social welfare, but increases ex ante expected firm profits (when either the probability of high quality or the extent of horizontal product differentiation is sufficiently high). When quality is interpreted as product safety, the foregoing results are modified in that for some parameter values ex ante expected social welfare is higher under confidentiality because such legal secrecy lowers expected litigation costs.

Signaling, quality, safety, confidentiality, duopoly

Abstract:
In this paper we examine the behavior of a firm that produces a product with a privately-observed safety attribute; that is, consumers cannot observe directly the product's safety. The firm may, at a cost, disclose its safety prior to sale; alternatively, if a firm does not disclose its safety then consumers can attempt to infer its safety from the price charged. The liability system is important because it is a determinant of the firm's full marginal cost, which consists of both manufacturing cost and liability cost. If the firm does not bear substantial liability for a consumer's harm, then the firm's marginal cost consists mainly of manufacturing cost, which is presumably higher for safer products. On the other hand, if the firm does bear substantial liability for a consumer's harm, then the firm's marginal cost consists of both manufacturing cost and liability cost. In this case, it is quite possible for a firm producing a safer product to have lower full marginal cost. We characterize the firm's equilibrium disclosure and pricing behavior, and compare that behavior and the associated welfare to what would occur under a regime of mandatory disclosure. We derive a range of disclosure costs that would induce a high-safety firm to choose disclosure over signaling. When the firm's full marginal cost is increasing (decreasing) in safety, a firm with a high-safety product will sometimes inefficiently choose to signal rather than disclose (disclose rather than to signal). Furthermore, we find that whether ex ante information regulation (in the form of mandatory disclosure) or reliance on ex post liability that induces information revelation is the better policy also depends upon whether the firm faces substantial liability for a consumer's harm. Finally, we find that a small fraction of naively optimistic consumers (who always buy as if the product were of high safety) leads to higher profits for both less-safe and safer products, and a reduced incentive for voluntary disclosure.

products liability, disclosure, signaling, safety, quality

Abstract:
We develop and explore a new model of the economics of privacy. Previous work has focused on privacy of type, wherein an agent privately knows an immutable characteristic. We consider privacy of action, wherein privacy means that an agent's choice of action is unobservable to others. To show how a policy of privacy can be socially optimal, we assume that an agent derives utility from an action he takes, from the aggregate of all agents' actions, and from other agents' perceptions of the agent's type (that are based on his action). If his action is observable, then he distorts it (relative to his full-information optimal action) so as to enhance the perceptions that others have of him. This contributes to aggregate welfare through increasing the public good, but the disutility associated with the distortion of agents' actions is also a social cost. If his action is unobservable, then he can take his full-information optimal action and still be pooled with other types. When the disutility of distortion is high relative to the marginal utility of the public good, a policy of privacy is optimal. We also consider a policy of waivable privacy, and find that equilibria exist in which some, but not all, types waive privacy. More significantly, if policies of privacy or publicity are costlessly enforceable, then a policy of waivable privacy is never socially preferred. Finally, we consider a number of examples (some of which involve a public bad and/or social disapproval): open-source software development; charitable giving; recycling; consumption of health services; DNA dragnets; student rankings; constraints on information disclosure at trial; electricity and water usage during periods of voluntary rationing; shaming of speeders; and the use of earmarks by Congress.

Privacy, public goods, disclosure, signaling, esteem

Abstract:
We explore how the incentives of a plaintiff and her attorney, when considering filing suit and bargaining over settlement, can differ between those suits associated with stand-alone torts cases and those suits involving mass torts. We contrast "individual-based liability determination" (IBLD), wherein a clear description of the mechanism by which a defendant's actions translate into a plaintiff's harm is available, with "population-based liability determination" (PBLD), wherein cases rely upon the prevalence of harms in the population to persuade a judge or jury to draw an inference of causation or fault. We show that PBLD creates a positive externality for the plaintiff's side that is inherent in many mass tort settings; this externality induces an increased propensity to file suit, higher settlement demands and greater joint payoffs for plaintiffs and their attorneys. Consequently, the defendant in a PBLD case faces an increased ex ante expected cost compared with the IBLD regime, thereby increasing incentives to take care. However, PBLD need not always imply an increased likelihood of trial relative to IBLD for any filed case (though it may lead to more cases being filed); the heightened aggressiveness of the plaintiff and her attorney can actually lead to a reduction in the likelihood of trial. Thus, PBLD can be more, or less, efficient than IBLD (in the sense of reducing trial costs), when considering cases that would be filed in both possible regimes.

Liability determination, settlement bargaining

Abstract:
Can the presence of private information in a transaction yield a Pareto-improvement over complete information? In this paper we show that the combination of multi-agent simultaneous signaling of private information, and the nature of the strategic interaction, can result in non-cooperative equilibria which are Pareto superior to the complete-information non-cooperative equilibrium. Our application involves two agents who become partners in the production of a product (or the undertaking of a project). The partners' efforts are complementary and, in addition to its direct contribution to product quality, observable (but non-verifiable) effort serves as a signal for the unobservable component, talent; each partner is privately informed only about her own talent. Because the partners share the payoff from the project, each is tempted to shirk in providing effort. However, the need for each partner to signal the quality of the product to potential buyers serves as a credible commitment to provide greater effort. We find that this non-cooperative, simultaneous signaling need not be wasteful, and can actually be welfare-enhancing in the strongest sense: there is a portion of the parameter space wherein incomplete information is Pareto-improving relative to the complete-information non-cooperative outcome for all possible non-degenerate prior distributions over the private information. Therefore, the combination of simultaneous-move strategic interaction and incomplete information can lead to conditions wherein the "problem" of adverse selection actually mitigates the problem of moral hazard.

private information, welfare, moral hazard, adverse selection, signaling, partnership

Abstract:
We model appeals courts as Bayesian decision makers with private information about a supreme court's interpretation of the law; each court also observes the previous decisions of other appeals courts in similar cases. Such 'persuasive influence' can cause 'herding' behavior by later appeals courts as decisions progressively rely more on previous decisions and less on a court's private information. We provide an example drawn from a recent United States Supreme Court decision finding unconstitutional a basic provision of a law previously found constitutional by six circuit courts. Herding on the wrong decision may remain uncorrected, since review of harmonious decisions is rare.

Abstract:
In this paper we examine a dynamic model of the process by which multiple related lawsuits may be filed and combined; we also examine actions a defendant may employ that may disrupt the formation of a joint suit. Our initial model involves two potential plaintiffs, with private information about the harm they have suffered, in a multi-period setting with positive costs of filing a suit. If two plaintiffs file, they join their suits to obtain a lower per-plaintiff trial cost and a higher likelihood of prevailing against the defendant. We find that some plaintiff types never file, some wait to see if another victim files and only then file, some file early and then drop their suits if not joined by another victim and, finally, some file and pursue their suits whether or not they are joined; thus, the equilibrium resembles a 'bandwagon.'

We then consider the effect of allowing preemptive settlement offers by the defendant aimed at discouraging follow-on suits. Preemptive settlement results in a 'gold rush' of cases into the first period. In general, plaintiffs (ex ante) strictly prefer that such preemptive settlements not be allowed, and computational results suggest this may be broadly true for defendants as well; however, the inability of defendants to commit to such a policy results in an equilibrium with preemptive settlement. Finally, we consider partial unawareness of victims as to the source of harm; this provides a role for plaintiffs’ attorneys, who may seek additional victims to join a combined lawsuit. Confidential preemptive settlements in the case of partial unawareness restrict the plaintiff’s attorney from seeking additional victims and therefore leads to higher preemptive settlement amounts. Moreover, the defendant strictly prefers to employ preemptive settlement if the fraction of unaware victims is sufficiently high.

Lawsuits, Settlement, Aggregation, Dynamics

Abstract:
This article describes two types of revealing equilibria in the presence of punitive damages meant to encourage truthful revelation of the safety of a product. Full information price (FIP) revealing equilibria occur when the equilibrium prices are those that would obtain under full information. Full information quantity (FIQ) revealing equilibria occur when the equilibrium quantities are those that would obtain under full information. We discuss the punitive damages policies which support each type of equilibrium and argue that FIP revealing equilibria are likely to be of greater interest.

Abstract:
Two entrepreneurs, each privately informed about her own talent, simultaneously and noncooperatively choose their efforts in producing a new product. Product quality depends on both entrepreneurs’ talents and efforts, but is unobservable by potential buyers prior to purchase; however, buyers can observe the entrepreneurs’ individual efforts. Because the entrepreneurs share the payoff, each is tempted to shirk. However, the need to signal quality to potential buyers serves as a credible commitment to provide greater effort. Thus, the “problem” of adverse selection mitigates the problem of moral hazard, so that a new venture can perform better than the corresponding mature market.

Abstract:
We explore informational externalities that arise when multiple plaintiffs are harmed by the behavior or product of a single defendant. An early plaintiff is likely to raise the awareness of a later plaintiff, and the later plaintiff will be able to learn something about the defendant's culpability by observing the disposition of the early suit: The presence of an early plaintiff provides a benefit to a later plaintiff. The presence of the later plaintiff also confers a potential benefit on the early plaintiff: The early plaintiff has the opportunity to charge the defendant for controlling the flow of information (e.g., through confidential settlement).

Abstract:
The United States Sentencing Commission was created to develop federal sentencing guidelines, which restrict judicial discretion and were to found to increase the average sentence length while leaving unchanged the likelihood of resolution through plea bargaining. A game-theoretic model is developed in which a sentencing commission may impose guidelines or defer to judicial discretion; then a defendant and a prosecutor engage in plea bargaining; finally, those cases that fail to settle go to trial, where a sentence is determined according to the guidelines, if imposed or, if not, according to judicial discretion. Equilibrium behavior is consistent with the aforementioned findings.

Abstract:
In this paper we examine the interplay between punitive damages and competitive forces in generating equilibria which reveal the safety of a product. We first construct a model to study the monopoly provision of a product whose safety is unobservable to consumers prior to purchase but is known by the firm and can be signaled via the product's price. Consumers have a role in this model in that their likelihood of purchase is based on the price they observe thereby reducing the incentive for mimicry of the more-safe product by the less-safe one. Nevertheless absent punitive damages there is a broad (and socially significant) portion of the parameter space wherein no revealing equilibria exist. That is the less safe product is able to take advantage of (rationally formed) consumer is perceptions of product safety since pooling (i.e. both product types charging the same price) characterizes the equilibria of this region. Further we show that punitive damages can be used to induce revelation(the less safe product is induced to break the pool) and we characterize the minimal punitive damages necessary to do this. We then embed this model in a multiple-firm context and characterize how the extent of competition influences this aforementioned required level of punitive damages. We find that competition reduces the required level of punitive damages especially in the most socially significant cases (those wherein the difference between the relative levels of compensation is greatest with respect to the relative levels of losses incurred). Competition and punitive damages are complementary in the sense that they jointly make consumer choice more effective by creating conditions under which revealing equilibria can exist.

Abstract:
Recent proposals to reform the frequency and amount of punitive damages involve absolute and proportional limits on awards, higher evidentiary standards and/or bifurcated trials, and the sharing of punitive damages awards with the state. In this paper we present a formal model, in the product safety context, that examines the effect of such reforms on equilibrium pricing and safety claims made by firms and on equilibrium settlements and awards made to consumers who have suffered losses due to product safety failures. A firm with private information may be tempted to intentionally misrepresent its product's quality, enabling it to charge more than an informed consumer would be willing to pay. Recognizing this temptation, consumers can provide market incentives for the firm to reveal its true quality through their purchasing behavior, but in some circumstances this is insufficient to ensure the existence of a revealing equilibrium. However, intentional misrepresentation is a tort which is subject to punitive damages, and we determine the minimum punitive damages necessary, in conjunction with consumer behavior, to deter it. We also argue that this corresponds to the maximum level of punitive damages which is legally justified. Raising evidentiary standards requires an increase in punitive damages in order to maintain deterrence, but has no effect on the equilibrium probability of trial and hence no effect on the expected trial costs. Raising the share of the punitive damage award taken by the state results in an increase in the equilibrium probability of settlement, and necessitates an increase in punitive damages awarded at trial in order to maintain deterrence.

Abstract:
The sentencing reform act of 1984 delegated to the USSC the authority to develop detailed guidelines specifying appropriate sentences for federal crimes. These guidelines restrict the exercise of judicial discretion and have increased the average sentence length while leaving unchanged the likelihood that a case is settled through plea bargaining. A game theoretic model involving three stages and four players is developed. In the first stage, the sentencing commission may impose guidelines or defer to judicial discretion; in the second stage, a defendant and a prosecutor engage in plea bargaining; in the third stage, those cases which fail to settle go to trial, where a sentence is determined according to the guidelines if these have been imposed or, if not, according to judicial discretion. Plea bargaining induces a biased selection of cases going to trial, so that judicial discretion will generally result in a sentence which is not optimal from the ex ante viewpoint of the sentencing commission, even though they share the same objective with respect to sentencing. In a signaling model, the sentencing commission imposes a sentence which exceeds the equilibrium sentence under judicial discretion. Moreover, the equilibrium probability of trial is insensitive to the sentencing regime (guidelines vs. judicial discretion). In a screening model, there exist circumstances which yield the same results; however, there also exist circumstances for which the sentencing commission will impose a sentence which is less than the equilibrium sentence under judicial discretion.