A plaintiff is suing a defendant for $100,000. The cost of going to court is $15,000 for each side.
a. The parties agree there is a 50 percent chance of the plaintiff’s winning the case. What is the range of mutually beneficial agreements that the parties might negotiate in an out-of-court settlement? What if each side believes its winning chance is 60 percent?
b. Suppose the damages are $200,000 and each side sees its winning chance at 60 percent. What are the prospects for an out-of-court settlement?
c. Suppose the plaintiff is bringing a nuisance suit. The plaintiff has no chance of winning in court, and both sides know it. Would it be rational for the defendant to settle the case out of court nonetheless? Explain. What legal rules can you suggest that might serve to deter nuisance suits?