Pretrial Bargaining with Asymmetric Information: Unilateral Versus Bilateral Payoff Relevance

1. Introduction Asymmetric information is a leading explanation for bargaining failure, and the role of asymmetric information has been extensively analyzed in the civil litigation literature. (1) Most of this literature concerns information that has bilateral payoff relevance in the sense that the information in question affects the expected payoff at trial of both the plaintiff and defendant. When there is bilateral payoff relevance, trials may be predicted in the equilibrium of the bargaining game, regardless of whether the informed or uninformed party makes the offer. In this article, we analyze information that has unilateral payoff relevance, meaning that it affects the expected payoff of one of the two parties to the dispute, but not the other. As an example, suppose the plaintiff has private information on her risk preferences. This affects her expected payoff at trial but not the defendant's. When there is unilateral payoff relevance, there are never inefficient trials in the equilibrium of the game where the informed party makes the offer. (2) However, there may still be costly disputes in the equilibrium of the game in which the uninformed party makes the offer.