A NOTE ON THE DIVERGENCE BETWEEN THE PRIVATE AND THE SOCIAL MOTIVE TOSETTLE UNDER A NEGLIGENCE RULE

The private motives to settle civil lawsuits are seldom aligned with t he interests of society. This article presents a simple model of a neg ligence rule where there is too much settlement. During pretrial barga ining, the injurer has private information about his care level. In eq uilibrium the injurer randomizes between taking due care and being neg ligent, and the uninformed victim randomizes between making a high set tlement offer (playing tough) and making a low settlement offer (playi ng soft). It is shown that social welfare would be improved if the vic tim were committed to take a tougher stance in negotiations and, conse quently, more cases went to trial. Three legal policies to help align the private and social motives to settle are discussed: litigation sub sidies, punitive damages, and the English Rule for allocating legal co sts.