inant explanation in the literature for the fact that a signi...cant proportion of disputes do not settle. In other words, assuming that settlement negotiations are less expensive than litigating the dispute to a ...nal resolution, parties will settle all disputes privately unless they hold su¢ ciently di¤erent beliefs about the expected bene...ts of going to court.

Di¤ering beliefs can arise in two ways. On the one hand, the parties may have ex-ante asymmetric information, i.e., one of the parties has superior knowledge about the merits of the dispute and the likelihood of prevailing in an adjudicated award. On the other hand, parties may have ex-ante symmetric information about the merits, but after the case is ...led they may observe di¤erent signals of the probability of prevailing in court. This gives rise to di¤ering posterior beliefs about the expected bene...ts of continuing the litigation rather than settling. If based on these posterior beliefs opposing parties are each relatively too optimistic about the expected bene...t of going to court, they will fail to reach a settlement. Both information structures, ex-ante asymmetric information and ex-ante symmetric information with di¤ering posterior beliefs, can result in systematic di¤erences between the average underlying merits of disputes that are settled out of court and disputes that proceed to binding adjudication.

A sizeable theoretical literature has focused on explaining why settlement negotiations fail in a signi...cant proportion of legal disputes and on characterizing the selection e¤ect of going to court. However, the lack of information on settlement amounts in most litigation data sets has been a major obstacle to testing and measuring the di¤erences in success rates and compensation amounts between settled and tried disputes. Our data set provides an almost unique opportunity to test and measure di¤erences between the outcomes of settled and tried lawsuits that result from ...ring disputes.

To provide background for what we do, in this section we review some of the relevant literature. We consider ...rst the implications of models that assume ex-ante asymmetric information as well as the empirical tests of these models. Second, we discuss the theoretical and empirical literature that assumes exante symmetric information. Finally we discuss other empirical work that has measured di¤erences between cases that settle and those that go to court.

# II.A Asymmetric Information Models

P’ng (1983) proposes one of the early models of litigation under asymmetric information. He assumes risk-neutral parties and one-sided asymmetric information, along with an exogenously set settlement amount. In the Nash equilibrium of this game the informed party cannot reveal its private information in its settlement o¤er, because this would allow the uninformed party to perfectly predict the potential trial outcome.<sup>1</sup> Therefore the average quality of cases that settle need not di¤er from that of tried cases.

> 1 The introduction of judicial error P’ng’s model generates some equilibria in which the informed party’s information is revealed, but the equilibrium with no information revelation continues to exist.

3