“Reputation in Repeated Settlement Bargaining” by Jihong Lee
Birkbeck College London
University of Pennsylvania
A long-lived player encounters disputes with a sequence of short-lived players, each at a time. The long-lived player has private information about his liability towards each claim. Each pair of long- and short-lived players attempt to resolve their dispute via negotiation but, should there be a disagreement, an unbiased yet imperfect third party is called upon to make a judgement. The short-lived players learn about the informed player through two channels: observed behavior of the informed player ("soft" information) and, if any, verdicts of the third party ("hard" information). The interplay between these two sources of information generates new, interesting equilibrium dynamics that feature reputation building. The predictions of the model explain a number of empirical puzzles identified in litigation and enable us to discuss several related policy issues.