ABSTRACT
This chapter focuses on the behavior of litigants, plaintiffs and defendants, deferring until later a consideration of the impact of judicial decision making on the evolution of the law. The first step in examining how the law evolves is to recognize that the vast majority of civil cases end up settling before they ever reach trial. The selection effect of these cases depends crucially on the bargaining between plaintiffs and defendants, in consultation with their lawyers, during the pre-trial period. This chapter reviews the economic theory of the settlement-trial decision. It then discusses the two principal economic models of litigation and settlement: the mutual optimism model; and asymmetric information model. The chapter further argues that the process of selective litigation combined with judicial indifference to efficiency, will cause the law to evolve in the direction of efficiency.
