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Third-Party Financing of Litigation: Legal Approaches and a Formal Model

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  • Dominique Demougin
  • Felix Maultzsch

Abstract

In the article, we discuss the phenomenon of third-party financing of lawsuits, which has been subject to intense debate from a legal as well as from an economic point of view. Drawing on the examples of Germany, Australia, and the United States, we show in Part I that different legal systems still take different approaches to third-party financing and its economic implications. In Part II, we introduce a stylized model that abstracts from the peculiarities of specific legal systems and in which we compare third-party financing of lawsuits with incentive fees for lawyers. We conclude that a combination of contingency fees and third-party financing may be the best way to overcome agency problems and financial constraints of would-be plaintiffs who would like to pursue meritorious claims. (JEL codes: K41)

Suggested Citation

  • Dominique Demougin & Felix Maultzsch, 2014. "Third-Party Financing of Litigation: Legal Approaches and a Formal Model," CESifo Economic Studies, CESifo, vol. 60(3), pages 525-553.
    • Handle: RePEc:oup:cesifo:v:60:y:2014:i:3:p:525-553.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ift006
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    Cited by:

    1. 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.
    2. 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.
    3. Landeo, Claudia & Nikitin, Maxim, 2015. "Financially-Constrained Lawyers," Working Papers 2015-8, University of Alberta, Department of Economics.

    More about this item

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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