Exploiting Plaintiffs Through Settlement: Divide and Conquer
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
August 6, 2007
Harvard Law and Economics Discussion Paper No. 591
This paper considers settlement negotiations between a single defendant and N plaintiffs when there are Fixed costs of litigation. When making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant adopts a divide and conquer strategy. Plaintiffs settle their claims for less than they are jointly worth. The problem is worse when N is larger, the offers are sequential, and the plaintiffs make offers instead. Although divide and conquer strategies dilute the defendant's incentives, they increase the settlement rate and reduce litigation spending. Plaintiffs can raise their joint payoff through transfer payments, voting rules, and covenants not to accept discriminatory offers.
Number of Pages in PDF File: 24
Keywords: litigation, settlement, class actions, bargaining, divide and conquer, contracting with externalities
JEL Classification: K4, C7, D8
Date posted: October 19, 2007 ; Last revised: December 18, 2007
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