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The Effect of Third-Party Funding of Plaintiffs on Settlement

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

Abstract

A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected.

Suggested Citation

  • Andrew F. Daughety & Jennifer F. Reinganum, 2014. "The Effect of Third-Party Funding of Plaintiffs on Settlement," American Economic Review, American Economic Association, vol. 104(8), pages 2552-2566, August.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:8:p:2552-66
    Note: DOI: 10.1257/aer.104.8.2552
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    References listed on IDEAS

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    1. Roland Kirstein & Neil Rickman, 2004. ""Third Party Contingency" Contracts in Settlement and Litigation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(4), pages 555-575, December.
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    4. Leshem Shmuel, 2009. "Contingent Fees, Signaling and Settlement Authority," Review of Law & Economics, De Gruyter, vol. 5(1), pages 435-460, June.
    5. Andrew F. Daughety & Jennifer F. Reinganum, 2013. "Search, bargaining, and signalling in the market for legal services," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 82-103, March.
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    7. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(2), pages 381-409, Fall.
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    9. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
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    1. Deffains, Bruno & Desrieux, Claudine, 2015. "To litigate or not to litigate? The impacts of third-party financing on litigation," International Review of Law and Economics, Elsevier, vol. 43(C), pages 178-189.
    2. Baumann, Florian & Friehe, Tim, 2014. "On discovery, restricting lawyers, and the settlement rate," DICE Discussion Papers 155, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Landeo, Claudia M. & Nikitin, Maxim, 2018. "Financially-constrained lawyers: An economic theory of legal disputes," Games and Economic Behavior, Elsevier, vol. 109(C), pages 625-647.
    4. Landeo, Claudia & Nikitin, Maxim, 2015. "Financially-Constrained Lawyers," Working Papers 2015-8, University of Alberta, Department of Economics.
    5. Jorge Lemus & Emil Temnyalov & John L. Turner, 2021. "Liability Insurance: Equilibrium Contracts under Monopoly and Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 83-115, February.
    6. Philipp Denter & John Morgan & Dana Sisak, 2022. "Showing Off or Laying Low? The Economics of Psych-outs," American Economic Journal: Microeconomics, American Economic Association, vol. 14(1), pages 529-580, February.
    7. Antill, Samuel & Grenadier, Steven R., 2023. "Financing the litigation arms race," Journal of Financial Economics, Elsevier, vol. 149(2), pages 218-234.
    8. Julia Shamir & Noam Shamir, 2021. "Third-party funding in a sequential litigation process," European Journal of Law and Economics, Springer, vol. 52(1), pages 169-202, August.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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