An Empirical Analysis of Litigation with Discovery

Abstract

We conduct an experimental analysis of discovery in both the signaling and screening games, where in both games an uninformed defendant may engage in costly discovery. Under the theory, the defendant should invoke the costly discovery procedure in the screening game, but not in the signaling game. In the later part of the screening game, discovery is invoked in 73% of all negotiations, which is strongly in the direction implied by theory. However, rather than lower the defendant’s expected cost, discovery is approximately a breakeven proposition. The reasons are that the defendant cannot, as implied by theory, extract the entire surplus from settlement with his offer and because there are excess disputes not predicted by the theory. In the signaling game we find, contra the theory, that discovery is invoked about 61% percent of the time, and this behavior persists into the later rounds of the experiment. While invoking discovery is predicted to reduce his payoff, the effect on the defendant’s cost is not statistically different from zero. The offers the defendant receives after invoking discovery contain surplus not predicted under the theory. There is mixed evidence regarding whether discovery reduces the societal cost of disputes.