Costly Voluntary Disclosure in a Signaling Game

Abstract

We conduct an experimental analysis of pretrial bargaining, while allowing for the costly disclosure of private information in a signaling game. Under the theory, 100% of plaintiffs with a weak case are predicted to remain silent, while 100% of the plaintiffs with a strong case are predicted to voluntarily disclose their type. In the second half of the experiment, 80% of weak plaintiffs remain silent and 69% of strong plaintiffs reveal their type. In line with theory, weak plaintiffs who reveal their type receive a lower payoff, while strong plaintiffs who reveal their type receive a higher payoff. Plaintiffs with a strong case who reveal their type have a dispute rate which is 50 percentage points lower than strong plaintiffs who remain silent. Because plaintiffs who reveal their type cannot extract the entire surplus from settlement from the defendant, the incentive to engage in voluntary disclosure is weaker empirically, than it is in theory.

Keywords: Experimental Bargaining, Civil Litigation, Asymmetric Information, Costly Disclosure

JEL Classification: K4, D82, C91, C78