SETTLEMENTS OUT-OF-COURT - EFFICIENCY AND EQUITY

This paper considers a model of out-of-court settlement negotiations i n which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will f ail to attain negotiated settlements (at least some of the time). Seco nd, there is a fundamental tradeoff between settlement efficiency and equity. increasing the frequency of out-of-court settlements inevitabl y means adopting settlements that are less responsive to the true meri ts of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average co urt expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court co sts results in a fall in the frequency of litigation.