On Divisibility and Credibility: The Effects of the Distribution of Litigation Costs Over Time on the Credibility of Threats to Sue
John M. Olin Center for Law, Economics, and Business, Harvard Law School, Discussion Paper No. 190
Posted: 16 Oct 1996
Date Written: August 1996
When the litigation costs of a potential plaintiff exceed the expected judgment in the case, the plaintiff's threat to sue can nevertheless succeed in extracting a settlement offer if that threat is credible. This paper analyzes how the credibility of such threats is shaped by the way in which the parties' litigation costs are expected to be distributed over time. The analysis starts by demonstrating that greater divisibility of litigation costs may help -- and can never hurt -- the plaintiff's strategic position. The analysis then identifies the strategic implications of the order in which the parties must incur the bulk of their litigation costs; it is shown that, contrary to what might be initially thought, the plaintiff will be better off if the defendant's costs must largely be incurred after the plaintiff's cost. Finally, for the various possible distributions of parties' costs over time, the analysis identifies necessary and sufficient conditions for the plaintiff's threat to be credible (and, therefore, to succeed in extracting a settlement).
JEL Classification: K41
Suggested Citation: Suggested Citation