This paper analyzes asymmetrically informed litigants' incentives to settle when they anticipate the possibility of appeals. It identifies a strategic effect, which induces a litigant to negotiate pretrial so as to optimize her posttrial bargaining position, and an information effect, which means that litigants will take into account pretrial how the information revealed by the trial court's verdict will translate into posttrial equilibrium payoffs. The paper's main contribution is twofold: First, it establishes a workhorse model of settlement and litigation in the shadow of appeals which may be used in future research to analyze specific issues of litigation and legal reform. Second, the importance of including the possibility of appeals in the litigation model is highlighted by an example in which some results contradict the immediate intuition: It is shown that (i) more accurate trial courts may actually attract less cases and (ii) cases may go to trial court with a larger ex-ante probability for higher legal costs in the appeals stage.
