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Financing the litigation arms race

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  • Antill, Samuel
  • Grenadier, Steven R.

Abstract

Using a dynamic real-option model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous implications for total ex-post litigant surplus. A defendant and a plaintiff bargain over a settlement payment. The defendant takes costly actions to avoid deadweight losses associated with large transfers to the plaintiff. Litigation financing bolsters the plaintiff, leading to larger deadweight losses. However, by endogenously deterring the defendant from taking costly actions, litigation financing can nonetheless improve the joint surplus of the plaintiff and defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.

Suggested Citation

  • Antill, Samuel & Grenadier, Steven R., 2023. "Financing the litigation arms race," Journal of Financial Economics, Elsevier, vol. 149(2), pages 218-234.
    • Handle: RePEc:eee:jfinec:v:149:y:2023:i:2:p:218-234
    DOI: 10.1016/j.jfineco.2023.05.004
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    More about this item

    Keywords

    Real options; Litigation financing; Third-party litigation funding; Dynamic bargaining;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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