Also, an assessment of an offer-of-settlement rule should take into account also the rule’s effect on the level of litigation costs in the event of trial. In our model, we took this level to be given exogenously. As is true for any fee-shifting rule, however, an offer-of-settlement rule would increase the litigation costs in trial, because, in the event of trial, each party would know that, with some probability, it would not have to bear fully its litigation costs.
Finally, even focusing only on the terms of settlement, it should be noted that our model has focused on only one reason — namely, asymmetric litigation costs — for settlement terms to deviate from the expected judgement. In particular, we have assumed that all litigants are risk-neutral, cannot credibly commit to a strategy that insists on a disproportionate share of the gains from settlement, and have an equal ability to make settlement offers. Relaxing these assumptions would introduce other sources for divergence between the terms of settlement and the expected judgment — such as differences between the parties in their ability to bear risk or to commit to a certain bargaining position. The presence of these other sources of divergence suggests that much analysis must be done before we know which rules and institutions would best align settlement outcomes with the expected judgment. We hope that future work will pursue this agenda for research.
This paper has analyzed the effect of offer-of-settlement rules on the terms of settlement. We first set forth a general result that enables us to identify the settlement amount under any such rule. We have then applied this result to derive the outcome under the most important of these rules, showing that a large set of seemingly different rules produces identical settlements. The identified effects of these rules on settlement terms have implications, which we have discussed, for any positive or normative evaluation of the rules.