Litigation with a Variable Cost of Trial

Abstract

We develop a model of pretrial bargaining under asymmetric information where both the plaintiff and the defendant’s cost of proceeding to trial is an increasing function of the judgment at trial. This contrasts with the standard assumption that costs at trial are a constant. As a result of this assumption, fee shifting can affect the incidence of trial in a model in which it would otherwise have no effect. Fee shifting will increase the incidence of trial if the plaintiff expects to shift costs to the defendant on net, and will lower the incidence of trial if the defendant expects to shift costs to the plaintiff. The model also implies that a reallocation of the variable costs of trial from the defendant to the plaintiff will lower the incidence of trial.

Keywords: Pretrial Bargaining, Asymmetric Information, Variable Cost of Trial, Fee Shifting

JEL Classification: C7, D82, K41