Credible discovery, settlement, and negative expected value suits

Abstract

We introduce discovery into a model of settlement and negative expected value (NEV) suits under asymmetric information. The option to conduct discovery has several important effects. First, because discovery is cheaper than litigation, it reduces the defendant's incentive to settle under asymmetric information. Second, discovery must be credible. Because discovery is more valuable the greater the uncertainty it resolves, this introduces a credibility constraint on pre‐discovery settlement offers. This can further reduce the probability and size of a defendant's pre‐discovery settlement offer. Lastly, discovery reduces the ability of NEV plaintiffs to use asymmetric information to extract significant settlements from defendants.