Going to Trial vs Settling and Mis. Matched Bargaining Power One of the main findings of this paper is that even in a world of complete and perfect information there are circumstances in which rational parties to a legal dispute will litigate in Court even though this is costly and hence wasteful. Going to Court (Assumption 1) is more expensive than settling out of Court. As we pointed out above, going to Court is a failure of the Xxxxx Theorem (Xxxxx, 1960). There we also mentioned that this failure is generated by a mis-match between the distribution of the parties bargaining power and the distribution of the ex-ante costs that must be paid for the pretrial negotiation to become feasible. This mis-match creates a version of the hold-up problem. This prevents one of the parties from paying their ex-ante cost and hence leaves Court litigation as the only way to end the legal dispute. In this Subsection, using Proposition 1, we substantiate in detail our claim that going to Court is generated by the mis-matched we have described. From Proposition 1 we know that P will file against D and the dispute will be litigated in Court if and only if (8) is violated and (9) holds.28 Purely for the sake of convenience we restate the former conditions here.29
Going to Trial vs Settling and Mis. Matched Bargaining Power One of the main findings of this paper is that even in a world of complete and perfect information there are circumstances in which rational parties to a legal dispute will litigate in Court even though this is costly and hence wasteful. Going to Court (Assumption 1) is more expensive than settling out of Court. As we pointed out above, going to Court is a failure of the Xxxxx Theorem (Xxxxx, 1960). There we also mentioned that this failure is generated by a mis-match between the distribution of the parties’ bargaining power and the distribution of the ex-ante costs that must be paid for the pretrial negotiation to become feasible. This mis-match creates a version of the hold-up problem. This prevents one of the parties from paying their ex-ante cost and hence leaves Court litigation as the only way to end the legal dispute. In this Subsection, using Proposition 1, we substantiate in detail our claim that going to Court is generated by the mis-match we have described. From Proposition 1 we know that P will file against D and the dispute will be litigated in Court if and only if (3) is violated and (1) holds. Purely for the sake of convenience we restate the former conditions here.27 β (cFT + cQT ) = β cT ≥ cFA and (1 − β) (cFT + cQT ) = (1 − β) cT ≥ cQA (3) If the first inequality in (3) is violated, then P will find it profitable to deviate unilaterally from paying the ex-ante cost cFA that makes the pretrial agreement negotiation possible. If the second inequality in (3) is violated, then D will find it profitable to deviate unilaterally from paying the ex-ante cost cAQ that makes the pretrial agreement negotiation possible. Notice that, because of Assumption 1, the two inequalities in (3) cannot be both vio- lated. However, it is also clear that for any fixed quadruple of costs (cFA, cQA, cFT , cQT ) satisfying Assumption 1 there exists values of β ∈ (0, 1) such that (3) is violated. Indeed, by simple inspection it is clear that, for any given (cAF , cQA , cFT , cTQ ) satisfying Assumption 1, we can find a (low) range of values of β ∈ (0, 1) such that the first inequality in (3) is violated. Alterna- tively we can find a (high) range of values of β ∈ (0, 1) such that the second inequality in (3) is violated. Similarly, if we fix a value of β ∈ (0, 1), it is always possible to find a quadruple 27See Footnote 25. of costs (cFA, cAQ, cTF , cTQ ) satisfying Assumption 1 such that (3) is violated.28 Since (1) can be satisfied for any...
