Costly Voluntary Disclosure with Negative Expected Value Suits

Abstract

A standard result in the litigation literature is that the informed party will not make a costly voluntary disclosure in a screening game. We develop a screening game in which an uninformed plaintiff makes an offer to an informed defendant. Under the American rule for the allocation of trial costs, we find that the defendant will make a costly voluntary disclosure if he can demonstrate to the plaintiff that she has a negative expected value suit. By doing so, the defendant can induce the plaintiff to drop the lawsuit. This assumes the cost of a voluntary disclosure is less than the cost of a full trial to the defendant. As a result of the information disclosure, the model will never exhibit the type of constrained equilibrium described by Nalebuff (1987). By contrast, under the English rule some defendants with a very high probability of prevailing at trial will not disclose their private information and the type of constrained equilibrium described by Nalebuff remains possible.

Keywords: Asymmetric Information, Pretrial Bargaining, Voluntary Disclosure, Negative Expected Value Suits

JEL Classification: C7, D82, K41