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The “Rainmaker’s Dilemma:” Bad Debt Loss Insurance in Settlement and Litigation

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  • Roland Kirstein

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Annette Kirstein

    (University of Karlsruhe)

  • Hans Gerhard

    (Saarland University)

Abstract

In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial can turn into a disaster when the defendant goes bankrupt before paying the plaintiff’s claim. “Rainmakers” face the following dilemma: the greater the success, the greater the defendant’s bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant’s bankruptcy, and of buying Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance have different impacts on the predicted outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, may have the opposite effect, as it decreases the settlement result.

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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2008_Dateien/2008_02.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08002.

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Length: 16 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:mag:wpaper:08002

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Keywords: Strategic Insurance; British Cost Allocation Rule; Nash Bargaining Solution;

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  1. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 27(3), pages 1067-97, September.
  2. Kirstein, Roland & Rickman, Neil, 2003. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series, Saarland University, CSLE - Center for the Study of Law and Economics 2003-09, Saarland University, CSLE - Center for the Study of Law and Economics.
  3. Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial detection skill and contractual compliance," International Review of Law and Economics, Elsevier, Elsevier, vol. 17(4), pages 509-520, December.
  4. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, Palgrave Macmillan, vol. 25(2), pages 251-261, April.
  5. Kidwell, David S. & Sorensen, Eric H. & Wachowicz, John M., 1987. "Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(03), pages 299-313, September.
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Cited by:
  1. Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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