Decision Rules in a Judicial Hierarchy

Abstract

In this paper, we extend the analysis of the consequences of litigant selection on the structure of judicial hierarchies to environments in which litigants may have asymmetric information about the merits of the case. In a prior paper, we constructed a simple model in which, after trial, litigants were fully informed about the merits of the case; we showed that under reasonable circumstances, the optimal judicial hierarchy had three tiers: a trial court, an intermediate appellate court and a supreme court. In this essay we weaken the assumption that the trial reveals to both litigants the appropriate decision in the case even when the court remains ignorant. A three-tiered hierarchy will now reduce errors to zero only under more restrictive conditions. More specifically, we identify three classes of equilibria in a three-tiered hierarchy in which the error rate is zero. The logic of these equilibria differs from the logic of the complete revelation equilibrium. Here, in order to achieve equilibrium, at least one of the inferior courts must not decide cases on the basis of its prior beliefs. Rather, in the absence of an informative signal, an inferior court should decide against the informed litigant in order to exploit that litigant's knowledge. The optimal decisional rule with potentially uninformed litigants thus differs from that when, after trial, both litigants are fully informed.