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Suit and Settlement vs. Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs

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Steven Shavell

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Abstract

Will a party who believes that he has a legally admissible claim for money damages decide to bring suit? if so, will he subsequently settle with the opposing party or will he go ahead to trial? These questions are analyzed under four methods for allocating legal costs, namely, under the American system, whereby each side bears its own costs; under the "indemnity" or British system, whereby the losing side bears all costs; under the system favoring the plaintiff whereby the plaintiff pays only his own costs if he loses and nothing otherwise; and under the system favor the defendant, whereby the defendant pays only his own costs if he loses and nothing otherwise. Following the analysis, two brief illustrations are considered and comments are made on the relative social desirability of the methods of allocating legal costs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0662.

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Date of creation: Apr 1981
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Handle: RePEc:nbr:nberwo:0662

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  1. Michael R. Baye & Dan Kovenock & Casper G. de Vries, 2004. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Working Papers 2004-24, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
  2. Steven Shavell, 1992. "Suit Versus Settlement When Parties Seek Nonmonetary Judgements," NBER Working Papers 4012, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Coughlan, Peter J. & Plott, Charles R., 1997. "An Experimental Analysis of the Structure of Legal Fees: American Rule vs. English Rule," Working Papers 1025, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  4. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Settlement Negotiations with Two-Sided Asymmetric Information: Model Duality, Information Distribution and Efficiency," Game Theory and Information 9403009, EconWPA. [Downloadable!]
    Other versions:
  5. Jean O. Lanjouw & Josh Lerner, 1997. "The Enforcement of Intellectual Property Rights: A Survey of the Empirical Literature," NBER Working Papers 6296, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Jean O Lanjouw & Josh Lerner, 2004. "The Enforcement of Intellectual Property Rights: A Survey of the Literature," Levine's Working Paper Archive 122247000000000486, David K. Levine. [Downloadable!]
  7. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations As Evidence in Court," Game Theory and Information 9403008, EconWPA. [Downloadable!]
    Other versions:
  8. Daniela Marchesi, 2007. "The Rule Incentives that Rule Civil Justice," ISAE Working Papers 85, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
  9. Kamphorst, Jurjen J.A. & Van Velthoven, Ben C.J., 2006. "The introduction of an appeals court in Dutch tax litigation," MPRA Paper 2008, University Library of Munich, Germany, revised 27 Apr 2006. [Downloadable!]
    Other versions:
  10. Michael R. Baye & Dan Kovenock & Casper G. de Vries, 2000. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Tinbergen Institute Discussion Papers 00-103/2, Tinbergen Institute. [Downloadable!]
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