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Settlement Escrows

Robert H. Gertner and Geoffrey P. Miller
The Journal of Legal Studies
Vol. 24, No. 1 (Jan., 1995), pp. 87-122
Stable URL: http://www.jstor.org/stable/724591
Page Count: 36
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Settlement Escrows
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Abstract

We analyze settlement escrows as an inexpensive method to reduce delay in pretrial bargaining. In a settlement escrow, an agent receives cash settlement offers from the parties to a lawsuit. If the defendant offers more than the plaintiff demands, the court imposes settlement at the midpoint of the offers. Absent settlement, the offers remain secret. We develop a model where adding a settlement escrow to a bargaining game reduces delay by lowering the costs of making reasonable settlement offers. Since offers remain secret if they do not cross, a disputant is less able to infer weakness in an opponent's case from his willingness to settle. Parties are thus willing to make offers into the escrow which they would not make directly. In addition to the model, we discuss how escrows may reduce delay if failure to settle is due to psychological factors, other strategic effects, or lawyer/client agency problems.

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