Pretrial Bargaining with Asymmetric Information and Endogenous Expenditure at Trial

Abstract

We develop a model with asymmetric information, where the uninformed party makes the offer. When parties proceed to trial, their endogenous expenditures partially determine the outcome. The endogenous spending at trial can either strengthen or weaken the bargaining position of the uninformed party with the player types who settle. When the bargaining position is strengthened, some standard results on information transmission prior to trial may be overturned. The recipient of the offer with a weak case may make a costly voluntary disclosure. In addition, the party making the offer may refuse costless discovery. Both of these results contrast with the standard results in the literature derived from models in which spending at trial is treated as exogenous.

Keywords: Pretrial Bargaining, Asymmetric Information, Endogenous Expenditure at Trial, Discovery, Disclosure

JEL Classification: K4, D8