Private Information, Self-Serving Biases, and Optimal Settlement Mechanisms: Theory and Evidence

32 Pages Posted: 25 Apr 2003  

Seth A. Seabury

University of Southern California - Keck School of Medicine

Eric L. Talley

Columbia University - School of Law

Date Written: April 2003

Abstract

The law and economics literature on suit and settlement has tended to focus on two alternative conceptual models. On the one hand, the "optimism" model of pre-trial negotiation attempts to explain settlement failure as an artifact of unfounded optimism by one or both parties. The idea that bargaining agents can adopt such non-rational biases receives support from experimental evidence. On the other hand, the "private information" model of pre-trial bargaining portrays settlement failures as an artifact of strategic information rent extraction. It finds support in some experimental evidence as well. This paper presents (for the first time) a mechanism-design approach for studying suit and settlement in the presence of both optimism and two-sided private information. We use a parameterization of our framework to generate testable comparative statics that distinguish between the two competing models, and then test these predictions using data from civil jury trials before and after the limitation on non-economic medical malpractice damages introduced by California legislation during the 1970s. Our (preliminary) results appear to be most consistent with the optimism model rather than the information model.

Suggested Citation

Seabury, Seth A. and Talley, Eric L., Private Information, Self-Serving Biases, and Optimal Settlement Mechanisms: Theory and Evidence (April 2003). USC Law School, Olin Research Paper No. 03-8; and USC CLEO Research Paper No. C03-8. Available at SSRN: https://ssrn.com/abstract=398840 or http://dx.doi.org/10.2139/ssrn.398840

Seth A. Seabury

University of Southern California - Keck School of Medicine ( email )

Los Angeles, CA 90089
United States

Eric L. Talley (Contact Author)

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

Paper statistics

Downloads
254
Rank
96,579
Abstract Views
2,203