Stalling, Conflict, and Settlement

Abstract

A widely-held assumption in the study of litigation and settlement is that if litigation is costly and settlement bargaining is costless, then in a complete-information setting, all disputes will settle with no need for litigation. This assumption is wrong. Even with complete information, perfectly rational parties may fail to settle out of court, and plaintiffs will spend resources to file suit, only for the parties thereafter to settle in court. This is because, outside of litigation, a strategy of stalling may be optimal for a defendant, and the plaintiff’s only alternative is (costly) litigation. In this paper, I present a simple model demonstrating how stalling occurs, derive empirical predictions from the model, show how the model explains categories of litigation that existing models reliant on private information cannot explain (large numbers of debt-collection cases that are litigated, but no issues are contested), and discuss policy implications (including the limits of prejudgment interest as a tool to encourage settlement).