A Potentially Known Confidential Settlement.

This article analyzes the incentives for defendants (D) and plaintiffs (P) to settle lawsuits confidentially, openly, or proceed to trial, considering that the existence of a confidential settlement may become publicly known. It develops a model where both litigants share full information about the defendant's culpability, but the public infers this culpability based on the litigation outcome's visibility and settlement type. The study finds that whether a publicly known confidential settlement signals greater or lesser culpability depends on which party—defendant or plaintiff—cares more about public perception: if the defendant cares more, confidentiality tends to signal higher culpability; if the plaintiff cares more, it signals lower culpability. The article further explores how privacy concerns, visibility probabilities, and the relative intensity of informational concerns affect settlement patterns and public inferences, and discusses implications for the debate on allowing confidential settlements, including their impact on defendants' ex ante incentives.