SFB 303 Discussion Paper No. A - 52
Author: Schweizer, Urs
Title: Litigation and Settlement in Sequential Equilibrium
Abstract: Two parties are assumed to have the choice between settling a dispute out of court and resorting to costly
litigation. The principle according to which parties will voluntarily transact whenever some mutually beneficial
transaction exists does not apply in a setting of incomplete information. In this paper, a game of litigation and
settlement is introduced which allows for two-sided asymmetric information. The corresponding set of
sequential equilibria is fully characterized. All but at most three distinguished equilibria will be shown to be
eliminated by a so-called interim rule. For these distinguished equilibria, the value of private information in
terms of expected payoffs is explored in detail. The informational structures of previous studies of litigation and
settlement are discussed as limiting cases of this paper`s more general framework.
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Creation-Date: April 1986
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