Litigation Selection as a Signal under Asymmetric Information: A Two-Type Model with Alternating Bargaining Offers

This paper studies the signaling role of the litigation/settlement selection under asymmetric information. As an attempt to improve existing asymmetric information theory, we separate litigation/settlement selection process and the actual settlement bargaining process, and adopt an infinitely repeated settlement bargaining with alternating offers, instead of the extreme 'take-it-or-leave-it' offer which has been frequently assumed in current literature. Upon the explicit derivation of the sequential equilibria, we interpret heuristically the role of asymmetric information in litigation selection, and provide comprehensive comparative static analyses for more concrete empirical testing of asymmetric information theory.