Costly Voluntary Disclosure with Negative Expected Value Suits

39 Pages Posted: 20 Dec 2015 Last revised: 1 Dec 2016

See all articles by Amy Farmer

Amy Farmer

University of Arkansas - Department of Economics

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: September 2016

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

Suggested Citation

Farmer, Amy and Pecorino, Paul, Costly Voluntary Disclosure with Negative Expected Value Suits (September 2016). Available at SSRN: https://ssrn.com/abstract=2705597 or http://dx.doi.org/10.2139/ssrn.2705597

Amy Farmer

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
501-575-6093 (Phone)
501-575-3241 (Fax)

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

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