Asymmetric information, pretrial negotiation and optimal decoupling

The "decoupled" liability system awards the plaintiff an amount that differs from what the defendant pays. This paper studies optimal decoupling design taking into account asymmetric information in the post-accident subgame. We show that the optimal payment by the defendant is greater than the optimal award to the plaintiff when the potential harm is sufficiently large. In that scenario, the optimal payment can be approximated by a multiple of the harm, but the plaintiff shall receive only a finite amount of the damages, regardless of the loss suffered. Such a decoupling scheme deters frivolous lawsuits without reducing defendants' incentive to exercise care. (c) 2007 Elsevier Inc. All rights reserved.