Working Paper: NBER ID: w19873
Authors: J.J. Prescott; Kathryn E. Spier; Albert Yoon
Abstract: This paper presents the first systematic theoretical and empirical study of high-low agreements in civil litigation. A high-low agreement is a private contract that, if signed by litigants before the conclusion of a trial, constrains any plaintiff recovery to a specified range. Whereas existing work describes litigation as a choice between trial and settlement, our examination of high-low agreements--an increasingly popular phenomenon in civil litigation--introduces partial or incomplete settlements. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants' mutual interest because they limit the risk of outlier awards while still allowing an optimal degree of speculation. Using claims data from a national insurance company, we describe the features of these agreements and empirically investigate the factors that may influence whether litigants discuss or enter into them. Our empirical findings are consistent with the predictions of the theoretical model. We also explore extensions and alternative explanations for high-low agreements, including their use to mitigate excessive, offsetting trial expenditures and the role that negotiation costs might play. Other applications include the use of collars in mergers and acquisitions.
Keywords: No keywords provided
JEL Codes: D86; K41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected litigation costs (K41) | occurrence of high-low discussions and agreements (J52) |
| high-low agreements (L14) | litigation behavior (K41) |
| claims expected to be low cost and highly volatile (G22) | discussions or agreements regarding high-low arrangements (J52) |
| high-low agreements (L14) | mutual interests of litigants (K41) |
| high-low agreements (L14) | risk exposure associated with trial outcomes (K41) |
| high-low agreements (L14) | optimal degree of speculation (D84) |