Asymmetric Information and the Selection of Disputes for Litigation

Abstract

WHAT explains the decision to litigate rather than settle a dispute? The standard theoretical approach to this question is a contract model that suggests that parties will litigate when the set of mutually beneficial settlement agreements-that is, the contract zone-is empty.' The contract zone may be empty because the parties have divergent expectations of the trial outcome or because one party has more at stake than the other.2 The divergent-expectations explanation suggests that there are general respects in which litigated disputes differ from settled disputes and that one need not know the identities of litigants or the specific area of litigation in order to understand the differences between litigated and settled disputes. The differential-stakes explanation implies that such information is necessary.3 The divergent-expectations theory of selection was developed in large