Why Go to Court? Bargaining Failure under the Shadow of Trial with Complete Information

Why do legal disputes ever go to trial? Prior research emphasizes the role of mistakes, irrationalities, or asymmetric information because rational litigants with complete or symmetric information should choose pre-trial settlements over the costs and risks of trial. Using a dynamic incomplete-contracting framework, we provide an overlooked rationale for going to court. Even though risky and costly, going to court can be both rational and socially efficient when a court decision enhances property rights and deters future costly litigation. Experimental evidence supports these predictions. Our findings provide new insights into the incidence of litigation and trial.