Exploiting plaintiffs through settlement: Divide and conquer

This paper considers settlement negotiations between a single

defendant and N plaintiffs when there are fixed costs of litigation. When

making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant

adopts a divide and conquer strategy. Plaintiffs settle their claims for less

than they are jointly worth. The problem is worse when N is larger, the

offers are sequential, and the plaintiffs make offers instead. Although divide

and conquer strategies dilute the defendant's incentives, they increase the

settlement rate and reduce litigation spending. Plaintiffs can raise their

joint payoff through transfer payments, voting rules, and covenants not to

accept discriminatory offers.(JEL: K4, C7, D8)