Preferences, Information and Settlement Failure

University of Alabama Economics, Finance and Legal Studies Working Paper No. 05-02-01

21 Pages Posted: 11 Nov 2004  

Amy Farmer

University of Arkansas - Department of Economics

Paul Pecorino

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

Date Written: November 2004

Abstract

Asymmetric information on preferences is a potentially important explanation of bargaining failure. Preferences are not directly observable and information about preferences may be difficult to credibly establish to a bargaining partner. Unobserved preferences which may be relevant for pretrial bargaining include the degree of risk aversion, the degree of litigiousness, and a taste for fairness. These contrast with fact based explanations such as asymmetric information on the probability of a finding for the plaintiff at trial or on the extent of the plaintiff's damages. In this paper, we show that there is an important difference between informational asymmetries which are fact based and those which are preference based. In particular, with a fact based asymmetry, the standard bargaining model predicts trials regardless of whether the uninformed party or the informed party makes the offer. By contrast, under the preference based explanation, disputes are only predicted in the model in which the uninformed party makes the offer. We illustrate this point in a simple model of pretrial bargaining.

Keywords: Pretrial Bargaining, Civil Litigation, Asymmetric Information, Risk Preferences

JEL Classification: D82, C78, K4

Suggested Citation

Farmer, Amy and Pecorino, Paul, Preferences, Information and Settlement Failure (November 2004). University of Alabama Economics, Finance and Legal Studies Working Paper No. 05-02-01. Available at SSRN: https://ssrn.com/abstract=618762 or http://dx.doi.org/10.2139/ssrn.618762

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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