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confidential settlement agreements as is common in products liability

suits.

11

Instead, Bayer eschewed secret settlement agreements and successfully settled the vast majority of cases according to its own

schedule at a total cost much lower than expected.

As this chapter

explains below, the decision not agreements was closely linked to cases.

to seek confidential settlement the successful settling of many

of

the

GAME-THEORETIC MODELS OF SETTLEMENT BEHAVIOR HELP EXPLAIN BAYER’S ACTIONS

Why did Bayer settlement behavior

adopt this provides a

strategy?

The economic literature on

good

starting

place

to

understand

the

incentives that efforts assumed

parties face during litigation and settlement.

Early

that

all

parties

possessed

full

information

about

the

strength of years, more

claims (Posner, 1973);(Landes, 1971). sophisticated and realistic models of

Over the past thirty settlement behavior

have been developed.

12

In particular, Spier (1992) showed that

settlement tends to follow a U-shaped curve.

After an initial flurry of

settlements, settlements decline until trial become imminent when they

increase.

In this model, two countervailing dynamics are at work.

Litigation is expensive so earlier rather than later.

that parties However, by

prefer to reach a settlement waiting until close to trial,

parties can make stronger take-it-or-leave-it offers which

to extract more of the surplus from avoiding trial.

imminent,

neither

party

can

make

empty

offers.

The

Since result

allows them trial is is a U-shaped

distribution of the timing of settlement (Spier, 2007).

13

Two strands

of this literature are particularly relevant to understanding the

____________

11 12 Interviews with Gary McConnell, George Lykos, John Ruiz. Daugherty and Reinganum (2008) provide an excellent overview of this literature.

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