Lawsuit as a Signaling Game under Asymmetric Information: A Continuum Types Model

This paper analyzes the signaling nature of litigation selection under asymmetric information. For the robustness of the analysis, we separate the litigation selection process, where the signaling from the informed party plays the key role, from the actual settlement where a more general bargaining method than the usual 'take-it-or-leave-it' is adopted. With full characterization of a sequential equilibrium, our model provides not only a sound theoretic base, but richer testable hypotheses for the comparative static analyses regarding adjudication rate, plaintiff's win rate, and the relationship between these two key indices, both under the defendant’s and the plaintiff's private information.