Journal of Law and Economics, Vol. 57, No. 3, August 2014
48 Pages Posted: 14 Sep 2010 Last revised: 14 Dec 2015
Date Written: August 2014
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.
Keywords: High-Low agreements, settlement, contracts, civil litigation, trial, arbitration, reserve accounts, insurance industry
JEL Classification: K41
Suggested Citation: Suggested Citation
Prescott, J.J. and Spier, Kathryn E. and Yoon, Albert, Trial and Settlement: A Study of High-Low Agreements (August 2014). 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. Available at SSRN: https://ssrn.com/abstract=1676404 or http://dx.doi.org/10.2139/ssrn.1676404