Trial and Settlement: A Study of High-Low Agreements

48 Pages Posted: 14 Sep 2010 Last revised: 14 Dec 2015

J.J. Prescott

University of Michigan Law School

Kathryn E. Spier

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

Albert Yoon

University of Toronto - Faculty of Law

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

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

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

J.J. Prescott (Contact Author)

University of Michigan Law School ( email )

3170 South Hall
701 S. State St.
Ann Arbor, MI 48109
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Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
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Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Albert Yoon

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada

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