Confidence, Optimism and Litigation: A Litigation Model under Ambiguity

This paper introduces ambiguity into an otherwise standard litigation model. The aim is to take into account optimism and confidence on the plaintiff side. We examine the following questions : 1) How optimism and confidence affect the outcomes of the settlement stage? 2) How optimism and confidence affect the level of care? 3) As a result what are the public policy implications in terms of monitoring the level of confidence? We show that the equilibrium probability of settlement is increasing in the degree of optimism for every plaintiffs and increasing in the level of confidence for pessimistic plaintiffs, provided the sensitivity of plaintiffs to a rise in the settlement offer is high, and that the same holds for the level of care independently of the sensitivity of plaintiffs to rises in the settlement offer. Finally, assuming the objective of the government is to minimize the probability of litigation and assuming that it can only manipulate the level of confidence, we find that a clear recommendation is possible only in the case of a high sensitivity of plaintiffs to rises in the settlement offer: government intervention to raise public confidence in the judicial system is recommended only when plaintiffs are pessimistic about their chances of winning and in that case, as much as possible should be spent.