THE TERMS OF SETTLEMENT: INTRODUCTION 4

The identification of the settlement amount expected under any given offer-of-settlement rule will enable us to examine: (i) which party benefits from each rule, and (ii) how the settlement amount compares with the expected judgment (that is, the mean amount that the parties expect the plaintiff to win at trial). The analysis shows, surprisingly, that a large set of seemingly different rules produce identical settlements.
Our model has important implications for both positive and normative analysis. The model enables us to derive not only the settlement outcomes that emerge under existing offer-of-settlement rules but also those that would occur under proposed offer-of-settlement rules (should they be adopted). This analysis is essential for any positive account of the outcomes produced by legal rules as well as for any normative evaluation of performance of these rules in producing desired outcomes.

One normative implication that we explore is the following. Parties often differ considerably in their litigation costs. In the absence of an offer-of-settlement rule, settlement amounts can be expected to deviate from the expected judgment in favor of the party with lower litigation costs. If the expected judgment in a case is the best available proxy for the outcome that is desired (from either a fairness or an efficiency perspective), then such deviations from the expected judgement are undesirable. Our analysis shows how, under some common circumstances, we can design offer-of-settlement rules to eliminate the bargaining advantage that the party with lower litigation costs would otherwise enjoy. Furthermore, to design these rules to accomplish this goal, public officials would not need to know in advance which party has the lower litigation costs. While we find the possible use of offer-of-settlement rules to neutralize the bargaining advantage of parties with lower litigation costs quite interesting, we wish to emphasize that, for the reasons discussed earlier, analysts who have no interest in this particular goal should still find relevant our general analysis of how offer-of-settlement rules affect settlement terms.