Abstract
This paper provides experimental evidence on the effectiveness of self-penalizing commitments as signaling mechanisms in pre-trial bargaining under asymmetric information. Using
an online experiment (N=2,041), we design a novel two-person signaling game with asymmetric information, where one party (the seller, analogous to a defendant) possesses private
information regarding the strength of its case, and proposes a take-it-or-leave-it settlement offer to another party (the buyer, analogous to a plaintiff). In the baseline scenario, the buyer
must decide whether to accept the offer or reject it and proceed to a costly trial. In our novel
signaling treatments, the seller can credibly commit ex ante to a costly monetary penalty contingent upon losing at trial. Consistent with theoretical predictions, our results show that selfpenalizing commitments significantly reduce trial rates: sellers with strong cases utilize commitment mechanisms more frequently, achieving settlements at lower offers. However, we also
document some departures from theory. When the signal is available but omitted, buyers penalize otherwise generous offers by rejecting them—an effect we term “signaling by omission.”
Our findings highlight the dual function of commitment-based mechanisms: they can enhance
bargaining efficiency by reducing informational asymmetries, but may also backfire when their
absence is misinterpreted.
an online experiment (N=2,041), we design a novel two-person signaling game with asymmetric information, where one party (the seller, analogous to a defendant) possesses private
information regarding the strength of its case, and proposes a take-it-or-leave-it settlement offer to another party (the buyer, analogous to a plaintiff). In the baseline scenario, the buyer
must decide whether to accept the offer or reject it and proceed to a costly trial. In our novel
signaling treatments, the seller can credibly commit ex ante to a costly monetary penalty contingent upon losing at trial. Consistent with theoretical predictions, our results show that selfpenalizing commitments significantly reduce trial rates: sellers with strong cases utilize commitment mechanisms more frequently, achieving settlements at lower offers. However, we also
document some departures from theory. When the signal is available but omitted, buyers penalize otherwise generous offers by rejecting them—an effect we term “signaling by omission.”
Our findings highlight the dual function of commitment-based mechanisms: they can enhance
bargaining efficiency by reducing informational asymmetries, but may also backfire when their
absence is misinterpreted.