This paper empirically tests the divergent expectations model of pre-trial bargaining by exploiting variation in tort liability for bad faith insurance law. Using a repeated cross-sectional dataset of auto insurance claims from the Insurance Research Council, it estimates that the tort remedy...

We examine the optimal claims settlement strategy for a liability insurer when claimants can permanently misrepresent their loss by engaging in costly claims falsification. In this environment claims auditing is not a possible deterrent to fraud, and the settlement strategy consists of an...