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http://ssrn.com/abstract=1676404
 
 

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Trial and Settlement: A Study of High-Low Agreements


J.J. Prescott


University of Michigan Law School

Kathryn E. Spier


Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Albert Yoon


University of Toronto - Faculty of Law

January 1, 2014

Harvard Law and Economics Discussion Paper No. 678
U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-022
U of Michigan Public Law Working Paper No. 217

Abstract:     
This paper presents the first systematic theoretical and empirical study of high-low agreements in civil litigation. A high-low agreement is a private contract that, if signed by litigants before the conclusion of a trial, constrains any plaintiff recovery to a specified range. Whereas existing work describes litigation as a choice between trial and settlement, our examination of high-low agreements — an increasingly popular phenomenon in civil litigation — introduces partial or incomplete settlements. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants’ mutual interest because they limit the risk of outlier awards while still allowing an optimal degree of speculation. Using claims data from a national insurance company, we describe the features of these agreements and empirically investigate the factors that may influence whether litigants discuss or enter into them. Our empirical findings are consistent with the predictions of the theoretical model. We also explore extensions and alternative explanations for high-low agreements, including their use to mitigate excessive, offsetting trial expenditures and the role that negotiation costs might play. Other applications include the use of collars in mergers and acquisitions.

Number of Pages in PDF File: 47

Keywords: High-Low agreements, settlement, contracts, civil litigation, trial, arbitration, reserve accounts, insurance industry

JEL Classification: K41

working papers series


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Date posted: September 14, 2010 ; Last revised: February 27, 2014

Suggested Citation

Prescott, J.J. and Spier, Kathryn E. and Yoon, Albert, Trial and Settlement: A Study of High-Low Agreements (January 1, 2014). Harvard Law and Economics Discussion Paper No. 678; U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-022; U of Michigan Public Law Working Paper No. 217. Available at SSRN: http://ssrn.com/abstract=1676404 or http://dx.doi.org/10.2139/ssrn.1676404

Contact Information

J.J. Prescott (Contact Author)
University of Michigan Law School ( email )
3170 South Hall
701 S. State St.
Ann Arbor, MI 48109
United States
734-763-2326 (Phone)

Kathryn E. Spier
Harvard University - Law School - Faculty ( email )
1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Albert Yoon
University of Toronto - Faculty of Law ( email )
78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada
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References:  82
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