NONBARGAINING IN THE SHADOW OF THE LAW

Analysis of data on civil litigation claims reveals two puzzles. First , despite the large casts of nonbargaining, only a fraction of claims receive more than one offer before settlement or adjudication. Second, the size of this fraction seems to depend on the type of parties invo lved in the claim. This paper develops a theory to explain these obser vations. The basic model describes bargaining between a risk-neutral d efendant who plays the litigation game repeatedly and a risk-averse pl aintiff who is involved in litigation only once. (This set-up, it is a rgued, is a good description of the parties in many civil litigation c ases.) The paper shows that (under certain circumstances) the defendan t will commit to withholding offers partially: In a two-period game, t he optimal strategy is to make a second offer to the plaintiff with a probability between zero and one. The dependence of this probability o n the characteristics of the plaintiff is described. A unique data set , collected from the files of the Taxing Masters in the United Kingdom , allows specific testing of the model's predictions. Regression analy sis and comparison with U.S. studies provide support for the theory. ( C) 1998 by Elsevier Science Inc.