Pretrial Bargaining with Asymmetric Information: Unilateral versus Bilateral Payoff Relevance

Abstract

Asymmetric information is a leading explanation for settlement failure that results in a costly trial. Typically, the information in question is assumed to have bilateral payoff relevance, meaning it affects the expected payoffs of both the plaintiff and defendant. When there is bilateral payoff relevance, trials may be predicted, regardless of whether it is the informed or uninformed party who makes the offer. However, there may be important cases in which information has unilateral payoff relevance. For example, if the plaintiff's risk preferences are private information, this information will affect the plaintiff's expected payoff at trial, but will have no effect on the expected payoff of the defendant. When there is unilateral payoff relevance, inefficient trials never occur when the informed party makes the offer. Trials can occur when the uninformed party makes the offer assuming that the private information affects the payoff of the individual holding the private information.