Confidence, Optimism, and Litigation: A Litigation Model under Ambiguity

This paper introduces ambiguity into an otherwise standard litigation model. The aim is to take into account the plaintiff’s optimism and confidence. We ask: (1) How do optimism and confidence affect (the outcomes of the) set-tlement? (2) How do optimism and confidence affect the level of care? (3) What are the public policy implications in terms of monitoring the level of confidence? We show that the equilibrium probability of settlement increases with the degree of optimism for all plaintiffs and increases with the level of confidence for pessimistic plaintiffs, provided plaintiffs are highly sensitive to a rise in the settlement offer is high, and that the same holds for the level of care independently of the plaintiffs ’ sensitivity to rises in the settlement offer. Finally, assuming the government’s objective is to minimize the probability of litigation and assuming that it can manipulate the level of confidence only, we find that a clear recommendation is possible only if plaintiffs are highly sensitive to rises in the settlement offer: government intervention to raise pub-lic confidence in the judicial system is recommended only when plaintiffs are pessimistic about their chances of winning, in which case, as much as possible should be spent