Court Costs and Pretrial Agreement Costs. We start by taking it as given that a suit has in fact been filed. We also abstract from the possibility that P could drop the suit after filing it, which instead will be considered at every stage of the timeline below. All parties are risk-neutral. At this stage it is useful to summarize our notation and write down the payoffs to the players as a consequence of the pretrial costs being paid or not, and the suit being litigated in Court or settled beforehand.9 Pay cDA Not Pay cDA Pay cPA S − cPA, −S − cDA I − cAP − cPT , −I − cDT Not Pay cPA I − cPT , −I − cAD − cTP I − cPT , −I − cDT Table 1: Summary of Payoffs The first assumption we make stipulates that a pretrial agreement is efficient. In particular, both parties are potentially better off by avoiding a costly trial.
Court Costs and Pretrial Agreement Costs. We return to the timeline of decisions shortly. We begin here with the basic structure of payoffs given by the expected outcome of a Court trial, possible settlement out of Court, pretrial negotiation costs and Court costs. In the timeline below, whether to file suit or not will be an actual decision that P takes. We start by taking it as given that a suit has in fact been filed. We also abstract from the possibility that P could drop the suit after filing it, which instead will be considered at every stage of the timeline below. If the suit ends up in Court, P wins with probability p, and, if he wins, D will pay damages in the amount I.5 We denote I = p I (1) the expected indemnity that P wins from D if the suit is adjudicated in Court. If instead the suit is settled out of Court, D will pay an amount S to P.6 The settlement S is determined via generalized Xxxx bargaining, the details of which will be clarified in Subsection 2.3 below. A settlement out of Court is only feasible if both parties pay (sequentially as we will see below) their ex-ante pretrial agreement costs. These are denoted by cPA and cDA for P and D respectively, with the total denoted by cA = cPA + cDA . As discussed below, these should be interpreted as time and expenses that need to be sunk by the parties preparing to bargain over a pretrial agreement. They are sunk by the time the bargaining takes place. We assume that going to Court is expensive. If the case is adjudicated in Court P needs to pay a cost cPT > 0 and D needs to pay a cost cTD > 0, with cT = cPT + cDT total Court costs. T The costs ci should be interpreted as expected Court costs. At this stage it is useful to summarize our notation and write down the payoffs to the players as a consequence of the pretrial costs being paid or not, and the suit being tried in 5We take I itself to be deterministic. This is inessential, and we proceed in this way purely for the sake of simplicity. S 6Again, we take to be deterministic, but this is inessential, and we proceed in this way purely for the sake of simplicity. The same comment applies to the pretrial and Court costs that we will introduce shortly. Pay cDA Not Pay cDA Pay cAP S − cPA, −S − cDA I − cPA − cPT , −I − cDT Not Pay cAP I − cPT , −I − cDA − cTP I − cPT , −I − cDT Court or settled beforehand. 7
Court Costs and Pretrial Agreement Costs. We start by taking it as given that a suit has in fact been filed. We also abstract from the possibility that P could drop the suit after filing it, which instead will be considered at every stage of the timeline below. All parties are risk-neutral. Pay cDA Not Pay cDA Pay cPA S − cPA, −S − cAD I − cAP − cPT , −I − cTD Not Pay cPA I − cPT , −I − cAD − cTP I − cPT , −I − cDT At this stage it is useful to summarize our notation and write down the payoffs to the players as a consequence of the pretrial costs being paid or not, and the suit being litigated in Court or settled beforehand.9
