An accident has occurred, causing $10,000 in harm to the victim. The amount of harm done is undisputed and easy to prove; punitive damages are not applicable, so any damage award would be for exactly $10,000.

This type of accident is governed by strict liability, so the injurer is legally responsible, but it may be difficult to prove in court that he caused the harm. The victim can hire a lawyer for $3,000 and go to trial, in which case he would have a 40% chance of winning. He could also hire an expert witness to testify. This would ensure victory at trial, but would cost an additional $10,000, for a total of $13,000. Going to trial costs the defendant (injurer) $5,000, regardless of whether the plaintiff (victim) hires an expert witness. Assume that neither party pays any legal expenses if an out-of-court settlement is reached.

Consider the following cost-shifting rule, similar in spirit to Federal Rule 68. If the case goes to trial and no damages are awarded, each side pays its own expenses. If damages are awarded and are lower than a settlement offer the plaintiff (victim) refused, the plaintiff pays both sides’ expenses. If damages are higher than a settlement offer the defendant (injurer) refused, the defendant pays both sides’ expenses.

(g) What will happen if the case goes to trial after the defendant offers to settle for $10,001? Is the plaintiff better off accepting this offer or going to trial?

(h) What will happen if the case goes to trial after the plaintiff offers to settle for $9,999? Is the defendant better off accepting this offer or going to trial?

(i) What do you expect to happen in pre-trial negotiations?

(j) In this scenario, would this cost-shifting rule lead to over-, under-, or efficient precaution on the part of the injurer?

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