NSF Award Abstract - #0239908

AWSFL008-DS3

Information Economics, Confidential Settlement Bargaining and Judicial
Decision-Making

Abstract

This research will use methods from game theory and information economics to examine two important aspects of the legal system and their implications for market and judicial efficiency. One topic is the impact of confidential settlements on performance in markets for goods and services. This research will address the market implications of this settlement option as well as alternative private and public policies to address what has come to be a significant concern: that allowing confidential settlement protects and encourages bad behavior by agents in a variety of markets. Alternatively, banning confidentiality may also compromise important values, such as personal privacy and the protection of intellectual property via trade secrecy; without the ability to conclude confidential settlements, some important cases may never be brought, and fewer of those brought are likely to settle. It is important to identify these tradeoffs and their implications for market performance in order that sensible public policy can be pursued (by judges and legislators). The second topic concerns how differences in information among litigants and judges affect the outcomes of individual cases and, ultimately, the evolution of the law. The judicial process is inherently passive: suits must be filed and appeals made in order for courts to be able to clarify rules and make/interpret law. When law is made, or interpreted, by a sequence of courts (as is true in our system), the effectiveness of correctives (such as appeal) may be attenuated by problems of insufficient resources or unwieldy organization.

The study will address a number of important policy issues. In the context of confidential settlements, does allowing confidential settlements adversely affect pricing and safety? Are there private responses to such inefficiencies that firms can make (e.g., can firms credibly, and profitably, commit to eschew confidential settlements?), or is new public policy necessary (such as banning confidentiality)? Does current law, such as the doctrine of vicarious liability (wherein, for example, corporations are liable for harms caused by employees' job-related actions), ameliorate or exacerbate the use of confidential settlements to hide the bad behavior of economic agents? In the context of modeling decision-making by courts, how does information get aggregated in hierarchical court systems? What competitive forces determine which cases receive higher-court review (essentially, how does the "market for certiorari" operate?)? To what degree will judicial inefficiency be systematic and persistent, or when will institutionalized correctives (such as judicial dissent) work to promote judicial efficiency? This research on information aggregation by courts contributes to understanding how courts function, how the law evolves, what may contribute to judicial inefficiency and what actions or policies may remedy such problems.