Resource Distribution in a Double Lawsuit

This chapter analyses efforts exerted and utilities obtained in a double lawsuit. This is a usual situation when insurance companies are involved in damage compensation. A victim files the first lawsuit against its insurance company for coverage. If the victim loses, there are no further lawsuits. If the victim wins, the insurance company files the second lawsuit against the perpetrator to recover its expenses. The situation is described as a two-period game, which is solved with backward induction. The model is based on the Hirshleifer and Osborne (2001) litigation success function that expresses influence of the counterparts’ efforts on the outcome of a lawsuit. The chapter analyses the optimal resource allocations in each lawsuit as functions of effort unit costs, the value of each lawsuit and the contest intensities in the lawsuits. It is shown that a one-period game where the victim, the insurance company and the perpetrator choose their efforts simultaneously and independently gives the same solution as the two-period game. In 2008 in the United States 15 million lawsuits were filed. Several of these were linked in the sense that subsequent lawsuits depend on the outcomes of earlier lawsuits. Lawsuits are commonly analysed separately. The chapter analyses in a novel manner the implications of two linked lawsuits referred to as a double lawsuit.