24 Pages Posted: 19 Oct 2007 Last revised: 18 Dec 2007
Date Written: August 6, 2007
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: 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