Litigation with Negative Expected Value Suits : An Experimental Analysis

The existence of lawsuits providing plaintiffs a negative expected value (NEV) at trial has important theoretical implications for signaling models of litigation. The signaling equilibrium possible absent NEV suits breaks down with NEV suits because plaintiffs do not have a credible threat to proceed to trial undermining the ability to signal type. Using a laboratory experiment, we analyze behavior with and without the possibility of NEV suits. Absent NEV suits, behavior largely follows predicted patterns. However, the possibility of NEV suits does not cause the signaling equilibrium to unravel and does not cause the dispute rate to increase. Plaintiffs only drop NEV lawsuits three-fourths of the time, the rejection rate by defendants for revealing demands rises less than predicted and, contra theory, the rejection rate on demands in the semi-pooling range remains unchanged