Failure to Settle Lawsuits

Adverse selection causes court battles. It should initially seem strange that all lawsuits don’t settle out of court. Since lawyers are very expensive, it might seem litigants could always do better if they settled their case rather than pay their attorneys to take them to trial.

Assume that you’re suing me. You have strong witnesses and a great case. If you go to trial you will probably win a million dollars. Even if you win, however, you will have to pay your lawyer $100,000, so you want to settle before trial to avoid attorney’s fees. You suggest to me that we should settle the case for a million dollars. If I knew everything that you knew, I should accept your offer. After all, I would have to pay you one million dollars at trial, so settling for a million would save me from attorney’s fees too.

Unfortunately, I would be unwilling to settle if I suspected that your case wasn’t that strong. Adverse selection should cause me to ask why you wanted to settle. You would most want to settle when your case was weak. Of course, it’s when your case is poor that I would most want to go to trial. Consequently, your willingness to settle is a signal to me that I shouldn’t settle. If I become informed about the case and realize you really would win one million dollars at trial, then I would be amenable to your offer. If I never learn about the strength of your case, however, I would always suspect that you wanted to settle because you were afraid to fight me in court.