Trial and Settlement: A Study of High-Low Agreements
University of Michigan Law School
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
University of Toronto - Faculty of Law
Journal of Law and Economics, Vol. 57, No. 3, August 2014
U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-022
U of Michigan Public Law Working Paper No. 217
This article 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 trial, constrains any plaintiff’s recovery to a specified range. 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 mutually beneficial 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. Other applications include the use of collars in mergers and acquisitions.
Number of Pages in PDF File: 48
Keywords: High-Low agreements, settlement, contracts, civil litigation, trial, arbitration, reserve accounts, insurance industry
JEL Classification: K41
Date posted: September 14, 2010 ; Last revised: December 14, 2015
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