Bebchuk (1984) extends P’ng’s analysis by allowing the settlement amount to be chosen by the parties. In this model the uninformed party (the plainti¤) makes a take-it-or-leave-it settlement o¤er to the defendant. In equilibrium the settlement o¤er made by the plainti¤ induces defendants who are relatively likely to lose in court to settle, while defendants who are relatively likely to win refuse to settle and go to court. Hence the quality of cases that settle is higher, on average, than that of cases that go to court. Bebchuk also studies the e¤ects of increasing the stakes in the case, i.e., the potential judgment against the defendant. He ...nds that as the stakes increase, the probability of settlement falls and settlement amounts increase. Nalebu¤ (1987) points out that Bebchuk’s results depend on an assumption that the plainti¤’s threat of going to court is always credible. Once this assumption is relaxed, Bebchuk’s result on the e¤ects of increasing the stakes can be reversed. As the likely judgment at trial increases (stakes increase) the credibility constraint of the plainti¤ may be relaxed, making her act less aggressively in settlement negotiations, and increasing the likelihood of a settlement.

Spier (1992) also assumes risk-neutrality and one-sided asymmetric information, but models the dynamics of settlement explicitly. Given an exogenously set trial date and a ...nite number of rounds of settlement o¤ers up to that date, she ...nds a U-shaped pattern of settlement, so that the probability of settlement is higher at the beginning of negotiations and close to the trial date. Fenn and Rickman (1999) use a data set containing negligence claims against NHS trusts in England to test Spier’s model of delay in settlement. They estimate the conditional probability of case settlement and test the e¤ects of changes in legal costs and levels of uncertainty on the probability of settlement.

Sieg (2000) uses data on medical malpractice suits in Florida to estimate an asymmetric information model similar to Nalebu¤’s. The data provide information about whether the dispute settles or not, as well as the amounts of compensation paid in court and in a settlement. He ...nds that the asymmetric information model can explain most observed empirical facts, in particular the fact that on average plainti¤s who settle receive a higher level of compensation, while those who do not settle receive a higher level of compensation if they win the case, but are very unlikely to win in court.

Farmer and Pecorino (2004) use a data set on ...nal o¤er arbitration in Major League Baseball that contains information on o¤ers from both parties, actual salary earned by the player after the arbitration process, and various statistics pertaining to the player’s market value. They ...nd that players who exaggerate their claims, by demanding a salary above their predicted market value, are more likely to reach the ...nal stage of arbitration, and more likely to earn a lower ex-post salary. They conclude that these results are inconsistent with a bargaining model in which the player has private information about some unobservable characteristic related to risk preferences or future market value. In such a model, players who exaggerated their salary demands would tend to be those whose true market value exceeded the predicted market value from publicly available information, and therefore would tend to earn higher salaries after the conclusion of the arbitration process.

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