The Appeal Decision and Settlement Bargaining

Abstract This paper analyses settlement bargaining under incomplete information when an appeal is possible. Litigants may engage in pretrial and, before reaching the appeals court, posttrial settlement bargaining. In the latter, both litigants utilise the information revealed at earlier stages, introducing the following effects: First, a defendant rejecting the pretrial settlement reveals having a strong case. Hence, a higher pretrial settlement rate weakens the plaintiff’s average case, thereby reducing her posttrial equilibrium payoff ( strategic effect ). Second, the trial judgment is a noisy public signal of the appeals judgment. Hence, winning at trial makes a litigant stronger in posttrial settlement bargaining ( information effect ). Unlike in the standard single-stage model of settlement bargaining, I find that lower legal costs may not always reduce settlement incentives and that the allocation of legal costs between litigants may matter. Additionally, a stronger correlation between judgments on both court levels weakens the strategic effect.