Judgment-Contingent Penalties: Signaling in Negative-Expected-Value Suits

Abstract

This paper explores judgment-contingent commitments as a signaling device in settings that implicate negative-expected-value (NEV) cases. We present two signaling options in which the informed party promises, in case of a loss at trial, to incur some loss in addition to the judgment. In the first, the additional amount is not transferred to the rival litigant (for example, commitment to pay a charity conditional on losing at trial). In the second, the informed party commits to transfer the additional amount to the rival party. The first variation reduces the rate of trials, whereas the second achieves a fully separating equilibrium. We conclude that, in contrast to the positive-expected-value (PEV) setting, informed defendants in NEV cases can always signal by committing to a self-penalty, conditional on losing at trial, without demanding a side payment. We therefore predict that signaling should be more common in NEV settings than in PEV settings.