The John M. Olin Center

Paper Abstract

591. Yeon-Koo Che & Kathryn E. Spier, Exploiting Plaintiffs Through Settlement: Divide and Conquer, 08/2007; subsequently published in The Journal of Institutional and Theoretical Economics, Vol. 164, No. 1, 2008, 4-23.

Abstract: This paper considers settlement negotiations between a single defendant and N plaintffs when there are fixed costs of litigation. When making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant adopts a divide and conquer strategy. Plaintffs settle their claims for less than they are jointly worth. The problem is worse when N is larger, the offers are sequential, and the plaintiffs make offers instead. Although divide and conquer strategies dilute the defendant's incentives, they increase the settlement rate and reduce litigation spending. Plaintiffs can raise their joint payoff through transfer payments, voting rules, and covenants not to accept discriminatory offers.

591: PDF