Does Cheap Talk Matter in Pre-Trial Negotiation?

Abstract

This paper examines the role of "cheap talk" in pre-trial negotiation and reconsiders the conventional wisdom that all cases will be settled without being litigated by virtue of voluntary transaction by legal parties who pursue economic efficiency. Two new aspects are considered that have been neglected in the literature on litigation under asymmetric information: bargaining costs and pre-play communication. If the preferences of the players are similar in the sense that bargaining costs are reasonably high enough to deter the defendant from triggering pre-trial negotiation, then costless communication can help to induce more settlement. Paradoxically, lower bargaining costs may harm social inefficiency.