Another reason why parties might prefer to go to court

There are other reasons for why parties might go to trial, which involve neither differing perceptions nor asymmetric information. One possibility is to realise that the costs of trial and settling are not fixed as we have assumed above, but that they emerge endogenously as a result of the parties engaging in rational threats against each other. This means that it could be possible for at least one party, the costs of gearing up for trial and then negotiating - using the rational threat approach described earlier - may exceed the costs of the alternative strategy of 'burning the bridges' from the outset, cutting off the lines of communication, and simply committing to go to court no matter what.

Robson and Skaperdas (2008) develop a model which explores the circumstances under which this can occur. The basic idea is that at the outset of a legal dispute process, there are two strategic paths that each of the parties can choose to go down:

  • 1. Gearing up for trial by employing costly mechanisms to influence disagreement points, but in the end settling out of court (the rational threat game); or
  • 2. Commit to going to court no matter what.

The payoff structures in each of these strategic situations are very different. Hence, as a general rule, the payoffs and costs incurred by each party will be very different in each situation. Since out of court settlement involves implementing the efficient level of production, the size of the 'pie' is bigger - so, all else being equal, this is usually the preferred option for the reasons discussed above. However, because the expected joint gains from eventually settling are so high, this means that the expected gains from influencing one's disagreement point in the rational threat game are much higher as well - which means that one or both parties may be more willing to incur very high legal costs in order to secure the gains from exchange.

Once these costs are taken into account, the net gains from going down the rational threat route could easily be less than the net gains from going down the conflict route from the outset. Hence it may not only be individually rational for individuals at the outset to want to go to trial - it may even be efficient, because the costs of activities that influence disagreement points in the rational threat game are not incurred. In other words, even though the parties miss out on getting a share of a larger pie by committing to go to court, much of this pie may have been dissipated anyway in costly preparations for gearing up for going to court and then settling.

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