Keywords: reputational gain, effort incentives, strategic interactions, settlement, endogenous noise
JEL codes: D80, K41, L12
Abstract
This article studies a model with two lawyers opposing each other in a case where the outcome of the trial depends on the lawyers' talents and choices of effort. The trial outcome provides an implicit incentive because it is informative about the lawyers' talents. Regardless of the functional form used to model the binary trial outcome, the implicit incentive can be characterized by three components, namely, the ex-ante uncertainty on the lawyers' talents, the sensitivity of the trial outcome to the lawyers' talents, and the variance of the noise in the trial outcome, which is endogenous. These components interplay with the lawyers' effort levels, affecting the informativeness of the trial outcome on the lawyers' talents. As a consequence, career concerns introduce distortions in litigation decisions. The strategic interactions that arise affect the equilibrium probability of prevailing in court, litigation costs, and consequently, settlement decisions as well as other stages of the litigation process. Furthermore, the merits of the case serve as a multiplier of the implicit incentive when the sensitivity of the trial outcome to the lawyers' talents is increasing in the difficulty of the case.
