Pre-Trial Bargaining and Litigation: The Search for Fairness and Efficiency

Article excerpt

The formal literature on pre-trial bargaining offers considerable insight on how different bargaining procedures asymmetric information affect efficiency. Less attention has been paid to fairness, despite the fact that fairness is an essential component of any system of justice. We address this state of affairs by analyzing the equilibria of a pre-trial bargaining model for both fairness and efficiency. This analysis involves ascertaining whether fair and efficient equilibria are possible and whether they occur For common parameter values, and characterizing their behavioral and distributional properties. We conclude that fairness is a paramount concern to litigants and society and that fair and efficient equilibria are possible.

1. Introduction

When do parties in a legal dispute go to trial, and when do they settle out of court? This basic question has motivated an extensive formal literature on pre-trial bargaining. On the whole, this literature is concerned with efficiency, as scholars have sought to understand how different bargaining procedures and types of asymmetric information affect the way litigants resolve disputes.

Scholars have devoted considerably less attention to fairness concerns, however. While undoubtedly efficiency is an important concern, fairness is perhaps a paramount concern not only of litigants and the legal community but also of society and for the acceptance of the rule of law. Legal systems are traditionally evaluated in terms of fairness (footer & Rubinfeld 1989). For our purposes, we believe that fairness under the law can be thought of as a process that fully compensates the plaintiff if and only if the defendant is at fault, although for the defendant, fairness dictates that the compensation is limited to the true amount of the damage. We define this further in section two, and formalize fairness in section four. This notion is one that the U.S. Supreme Court has expressed on numerous occasions in its cases interpreting the Due Process Clauses of the Fifth and Fourteenth Amendments.1

If the process were not fair litigants would have little reason to litigate or accept settlement terms or trial outcomes. Citizens use and obey the outcomes of fair institutions. The legitimacy of trial courts as dispute resolution mechanisms is premised on fairness. As Tyler (1990) notes, regardless of the outcome, if litigants perceive the process as fair, then there is general acceptance of the outcome, and hence compliance with the law.

Even if the court process is efficient in allocating reward and punishment, litigation might have little to offer society in ensuring compliance and using courts to achieve outcomes. Ultimately, in terms of regulation of behavior, social control solely through reward and punishment might actually be inefficient (Tyler 1990). Most litigation models have examined individual litigant behavior and then have proposed modifications or adjustments to ensure greater efficiency at the individual trial level. Our concern, however, is not only efficiency or reward or punishment at the individual level. Through this examination we wish to address the broader concerns of litigation and its impact on peoples' compliance and acceptance of rules and law. We propose to examine the issue of whether there is a trade-off between fairness and efficiency or whether equilibrium outcomes can be both fair and efficient. If the latter is true, what are the behavioral and distributional properties of these outcomes? If there are trade-offs involved in pursuing fairness and efficiency, what are they and how do they vary across different bargaining environments?

In this article, we present a pre-trial bargaining model that examines strategic litigant behavior through both the fairness and efficiency of the model's equilibria. We extend a well-known model (Bebchuk 1984) and identify new relationships between litigation costs, parties to the litigation, and outcomes. …