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| Nuisance Suits II: Using Sunk Costs Strategically |
THE ORDER OF PLAY:
1. The plaintiff decides whether to bring suit against the defendant at cost c.
2. The plaintiff makes a take-it-or-leave-it settlement offer of s>0.
3. The defendant accepts or rejects the settlement offer.
4. If the defendant rejects the offer, the plaintiff pays his lawyer the amount p in advance, with no refund if the case settles. Then the plaintiff decides whether to give up or go to trial at a cost d to the defendant.
5. If the case goes to trial, the plaintiff wins amount x with probability γ and otherwise wins nothing.
PAYOFFS: It seems I can not draw the extensive form here...
The author Rasmusen said these things about this adapted model.
'This, in turn, means that the plaintiff would only prefer settlement to trial if s>γx. The defendant would prefer settlement to trial if s<γx+d, so there is a positive settlement range of (γx, γx+d) within which both players are willing to settle.'
I can totally understand it. However, I can not understand the following:
"Here, allowing the plaintiff to make a take-it-or-leave-it offer means that s=γx+d in equilibrium, and if γx+d>p+c, the nuisance suit will be brought even though γx<p+c. Thus, the plaintiff is bringing the suit only because he can extort d, the amount of the defendant's legal costs."
Could anyone explain its meaning to me? Thank you very much.
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