Settlement strategies

Economic models of litigation and settlement assume either that the plaintiff and defendant bargain over the settlement amount or that one party makes a single, take-it-or-leave-it offer. This article examines the choice between these two strategies by the defendant, assuming that he is able to precommit to a single offer. The advantage of the take-it-or-leave-it strategy is that it saves on bargaining costs and prevents plaintiffs who accept the offer from negotiating a larger share of the surplus from settlement. The advantage of the bargaining strategy is that it allows the defendant to individualize the settlement amount, thereby increasing the settlement rate and saving trial costs. The article derives the conditions under which each strategy is cost minimizing.