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    11 -

settlement agreements with early plaintiffs, the defendant credibly

commits to treating subsequent

early plaintiffs that holding out for more.

there is The MFN

plaintiffs no benefit clause has

similarly.

This convinces

to delaying

settlement or

the

function

of

committing

the

defendant to plaintiffs.

not later offer a more generous settlement to If the defendant were to do so having earlier

other contracted

to

a MFN clause, the defendant would to the early-settling plaintiffs.

also have to make additional payments Therefore, the plaintiffs will reason

that a defendant will not offer a higher amount in the second round and will be more likely to accept the defendant’s first round settlement. Spier concluded that defendants almost always gain from the use of this

clause.

15

Bayer’s announcement of the existence of a fixed schedule coupled with no confidentiality acted as an analog of a MFN clause by serving to credibly commit it to paying out fixed amounts for particular injuries. If Bayer were to “cheat” by paying out higher amounts to later plaintiffs, its long-term reputation for honoring its commitments would be harmed.

The economic literature also models the secret settlement. Daugherty and Reinganum (1999) formally model secret settlements and

show to a

how defendants will often be willing to pay for secrecy in agreeing

settlement.

Secrecy

is

attractive

to

defendants

if

it

will

reduce

the likelihood of future claims.

16

sold to later buyers at a lower price.

As a result, the high valuation

buyers will pay full-price subsequently lower prices. monopolist to capture full

  • --

    confident that the monopolist will

Butz (1990) showed this allows the monopoly rents.

not

15

Early-settling plaintiffs sometimes also gain from the use of

the MFN clause in a settlement. extended this model.

Daughterty and Reinganum (2004)

16 In Daugherty and Reinganum (2005), the authors extend this model to include consumer behavior and show that the use of confidential settlement as a strategy leads to lower product safety which may reduce

demand. firm may

If credible auditing choose openness.

is

inexpensive

enough,

however,

a

rational

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