A Note on the Divergence between the Private and the Social Motive to Settle under a Negligence Rule

Abstract

The private motives to settle civil lawsuits are seldom aligned with the interests of society. This article presents a simple model of a negligence rule where there is too much settlement. During pretrial bargaining, the injurer has private information about his care level. In equilibrium the injurer randomizes between taking due care and being negligent, and the uninformed victim randomizes between making a high settlement offer (playing tough) and making a low settlement offer (playing soft). It is shown that social welfare would be improved if the victim were committed to take a tougher stance in negotiations and, consequently, more cases went to trial. Three legal policies to help align the private and social motives to settle are discussed: litigation subsidies, punitive damages, and the English Rule for allocating legal costs.