Can Fee Shifting Reduce the Incidence of Trial? Pretrial Bargaining in the Face of a Rule 68 Offer

Under Rule 68, a defendant may submit a pretrial offer of judgment to the plaintiff. If the plaintiff refuses this offer and later receives a smaller award at trial, the defendant's court costs subsequent to the offer are shifted to the plaintiff. We analyze Rule 68 in a game theoretic setting where trials may result from an informational asymmetry in which the defendant is the informed party. We find that Rule 68 may help to encourage settlement through the offer of judgment which may partially reveal privately held information. However, the effectiveness of Rule 68 in encouraging settlement depends upon the amount of fees subject to shifting. Increasing the fees subject to shifting has an ambiguous effect on settlement, but taking the extent of fee shifting as given, settlement rates are always higher with Rule 68 than without it. The structure of the model and the key results are contrasted with Spier (1994).