The “Rainmaker’s Dilemma:” Bad Debt Loss Insurance in Settlement and Litigation
AbstractIn 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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Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08002.
Length: 16 pages
Date of creation: Jan 2008
Date of revision:
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Strategic Insurance; British Cost Allocation Rule; Nash Bargaining Solution;
Other versions of this item:
- Kirstein, Roland & Gerhard, Hans, 2005. "The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation," CSLE Discussion Paper Series 2005-02, Saarland University, CSLE - Center for the Study of Law and Economics.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-12 (All new papers)
- NEP-IAS-2008-01-12 (Insurance Economics)
- NEP-LAW-2008-01-12 (Law & Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kirstein, Roland & Rickman, Neil, 2002.
""Third Party Contingency" contracts in settlement and litigation,"
Berkeley Olin Program in Law & Economics, Working Paper Series
qt6vn9877z, Berkeley Olin Program in Law & Economics.
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- Roland Kirstein & Neil Rickman, . "Third Party Contingency contracts in settlement and litigation," German Working Papers in Law and Economics 2002-1-1038, Berkeley Electronic Press.
- Kirstein, Roland & Rickman, Neil, 2002. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series 2002-11, Saarland University, CSLE - Center for the Study of Law and Economics.
- Kirstein, Roland & Rickman, Neil, 2003. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series 2003-09, Saarland University, CSLE - Center for the Study of Law and Economics.
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"Judicial detection skill and contractual compliance,"
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- Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial Detection Skill and Contractual Compliance," CSLE Discussion Paper Series 97-07, Saarland University, CSLE - Center for the Study of Law and Economics.
- Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
- Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
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