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Should Plaintiffs Win What Defendants Lose?: Litigation Stakes, Litigation Effort, and the Benefits of 'Decoupling'

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  • Albert Choi

    (University of Virginia - Department of Economics)

  • Chris Sanchirico

    (University of Pennsylvania Law School & Wharton School)

Abstract

Professors Polinsky and Che advocate "decoupling" what plaintiffs recover from what defendants pay in damages, specifically arguing that lowering recovery and raising damages (by appropriate amounts) delivers the same level of primary activity deterrence with fewer filed suits. Professors Kahan and Tuckman extend Polinsky and Che's analysis to account for the effect of parties' litigation stakes on the cost of each filed suit, provisionally concluding that Polinsky and Che's basic argument remains intact. This article reaches a different conclusion. We show that when the effect of litigation stakes on litigation effort is more fully taken into account, lowering recovery and raising damages may no longer improve social welfare. In addition, we characterize the kinds of suits in which the optimal level of recovery is no less than the optimal level of damages. Of rhetorical significance in the current policy debate, we find that such suits resemble the negative picture of modern litigation invoked by some advocates of reduced recovery. Our basic findings are robust to the possibility of out-of-court settlement, plaintiffs' employment of contingent fee lawyers, and alternative fee-shifting rules.

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Paper provided by University of Pennsylvania Law School in its series Scholarship at Penn Law with number upenn_wps-1000.

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Handle: RePEc:bep:upennl:upenn_wps-1000

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Web page: http://www.law.upenn.edu/

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Cited by:
  1. Claudia M. Landeo & Maxim Nikitin, 2006. "Split-Award Tort Reform, Firm's Level of Care, and Litigation Outcomes," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(4), pages 571-600, December.
  2. Landeo, Claudia M. & Nikitin, Maxim & Babcock, Linda, 2007. "Split-awards and disputes: An experimental study of a strategic model of litigation," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 553-572, July.
  3. Philip Bond, 2004. "Optimal plaintiff incentives when courts are imperfect," 2004 Meeting Papers 723, Society for Economic Dynamics.
  4. Darius Lakdawalla & Eric Talley, 2006. "Optimal Liability for Terrorism," NBER Working Papers 12578, National Bureau of Economic Research, Inc.
  5. Nuno Garoupa, 2009. "Least-Cost Avoidance: The Tragedy of Common Safety," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(1), pages 235-261, May.
  6. Aaron Finkle, 2010. "Contracts in the Shadow of the Law: Optimal Litigation Strategies within Organizations," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 9(2), pages 131-155, August.
  7. Chu, C.Y. Cyrus & Chien, Hung-Ken, 2007. "Asymmetric information, pretrial negotiation and optimal decoupling," International Review of Law and Economics, Elsevier, vol. 27(3), pages 312-329, September.

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