Roland Kirstein () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) Annette Kirstein (University of Karlsruhe) Hans Gerhard (Saarland University)
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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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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number
08002.
Find related papers by JEL classification: K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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