Litigation with Default Judgments

Abstract

In a model of pretrial bargaining under asymmetric information, we analyze the defendant’s threat to proceed to trial in the face of a rejected offer. The incidence of trial is lower when the defendant’s constraint is binding compared with the unconstrained case. The signs of some of the comparative statics of the model are a function of whether or not the defendant’s credibility constraint is binding. In particular, fee shifting has no effect on the incidence of trial when the credibility constraint is not binding, but has an ambiguous effect when the constraint is binding. In this latter case, the use of fee shifting will lower the incidence of trial if and only if the plaintiff expects to shifts fees on net to the defendant.

Keywords: Pretrial Bargaining, asymmetric information, default judgments

JEL Classification: K41, C7