Exploiting Plaintiffs Through Settlement: Divide and Conquer

24 Pages Posted: 19 Oct 2007 Last revised: 18 Dec 2007

Yeon-Koo Che

Columbia University

Kathryn E. Spier

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

Date Written: August 6, 2007

Abstract

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.

Keywords: litigation, settlement, class actions, bargaining, divide and conquer, contracting with externalities

JEL Classification: K4, C7, D8

Suggested Citation

Che , Yeon-Koo and Spier, Kathryn E., Exploiting Plaintiffs Through Settlement: Divide and Conquer (August 6, 2007). Harvard Law and Economics Discussion Paper No. 591. Available at SSRN: https://ssrn.com/abstract=1009360 or http://dx.doi.org/10.2139/ssrn.1009360

Yeon-Koo Che

Columbia University ( email )

420 W. 118th Street, 1016IAB
New York, NY 10027
United States
212-854-8276 (Phone)

HOME PAGE: http://www.columbia.edu/~yc2271

Kathryn E. Spier (Contact Author)

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

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