Litigation, Experimentation, and Reputation

Author's description: In suits involving products liability, environmental harms, and antitrust violations, there are frequently several potential or actual plaintiffs who bring separate suits. The purpose of this paper is to examine the defendant's settlement behavior in such settings, where plaintiffs have private information about their case -- in particular, about the damages they have sustained. The paper develops a model in which the defendant negotiates sequentially with a series of multiple plaintiffs, where there is a correlation across plaintiffs' damage levels. The paper argues that the defendant will rationally engage in experimentation in order to learn (or, sometimes, to remain uninformed about) the plaintiffs' private information; and that the defendant may play tougher (or, sometimes, softer) in settlement bargaining in early cases, given that he anticipates future suits.