Pretrial Settlement with Fairness

Abstract

We introduce fairness into three models of pretrial settlement and find that it increases the incidence of trial in each. This is true despite the fact that the fairness taste parameter is common knowledge. In the standard model, the party who makes the final offer can extract essentially all of her bargaining partner's trial cost through this offer. A taste for fairness is reflected in the percentage of their own trial costs a party is willing to give up in accepting this final offer. In the Bebchuk (1984) and Reinganum and Wilde (1986) models a taste for fairness on the part of the defendant lowers the costs of rejected offers to the plaintiff and so increases the incidence of trial. In the Shavell (1982) model, a taste for fairness reduces and may eliminate the contract zone, thereby increasing the incidence of trial.

Keywords: Pretrial Settlement, Fairness, Asymmetric Information

JEL Classification: K4, D8