Negative Expected Value Suits in a Signaling Model

Abstract

We extend the 1986 signaling model of Reinganum and Wilde by allowing for the possibility of negative expected value (NEV) suits. If filing costs are zero, the equilibrium consistent with the D1 refinement implies that settlement offers face a rejection rate of 100%. If filing costs are positive, an equilibrium with settlement can be restored. In this equilibrium plaintiffs with NEV suits choose not to file, but settlement rates fall below the level in the model without NEV suits. This fall in settlement rates may be substantial. In addition, by making the filing decision endogenous, we are able to derive new insights into the effects of fee shifting in the signaling model.