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Figure 1—Informal Model of Settlement Incentives

The first number in the parentheses represents the recovery and the second represents the defendant’s loss.

plaintiff’s The parties

have an opportunity to settle the case at Time 1 or at Time 2,

immediately

before

trial.

The

defendant

cannot

reliable

distinguish

plaintiffs

who

would

be

willing

to

settle

at

time

1

for

plaintiffs

who

would

be

willing

to

settle

at

time

2

for

that

3 from

6.

Assume

plaintiffs can be divided up into low-valuation

valuation

plaintiffs.

Low-valuation

plaintiffs

plaintiffs and high- would be generally

willing to settle the case right away (for $3 in

Time 1). to trial

In and

contrast, high-valuation plaintiffs have a higher reservation price ($6

the diagram above at are more willing to go in the above diagram).

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