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Can you help me with this problem? I have no clue where to start. Thanks! Problem 3 Bargaining in the shadow of trial Plaintiff {P}
Can you help me with this problem? I have no clue where to start. Thanks!
Problem 3 Bargaining in the shadow of trial Plaintiff {P} sues defendant (D) for damages. P believes that with probability pp, the jury will award damages of $1,000 (D will have to pay $1,000 to P) and with probability 1 y, the jury will not award any damages at all. D believes that with probability pg, the jury will award damages of $1,000 (again, D will have to pay $1,000 to P in this case) and with probability 1 pH, the jury will not award any damages at all. Regardless of outcome, both parties have to pay $200 in court fees if they go to trial. They can avoid going to trial and paying these fees if they can reach a settlement. Assume transactions costs are negligible, such that the settlement process is effectively costless. Use Nash bargaining to answer the following questions. 1. Suppose 1),: = p0 = 0. 5. That is, both share the same beliefs that with 50% probability, D will have to pay $1,000 to P. Will the parties be able to reach a settlement? If so, what settlement do they reach? 2. Now suppose pp = 0. 6 and pa = 0.3. In this case, the parties are relatively optimistic. Will the parties be able to reach a settlement? If so, what settlement do they reach? 3. Now suppose pp = 0. 9. What is the critical level of 113, such that no settlement is possible and the parties go to trial? Explain, intuitively, why the parties will not be able to reach a Settlement under these circumstancesStep by Step Solution
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