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Optimal Awards and Penalties when the Probability of Prevailing Varies Among Plaintiffs

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  • A. Mitchell Polinsky
  • Daniel L. Rubinfeld

Abstract

This article derives the optimal award to a winning plaintiff and the optimal penalty on a losing plaintiff when the probability of prevailing varies among plaintiffs. Optimality is defined in terms of achieving a specified degree of deterrence of potential injurers with the lowest litigation cost. Our main result is that the optimal penalty on a losing plaintiff is positive, in contrast to common practice in the United States. By penalizing losing plaintiffs and raising the award to winning plaintiffs (relative to what it would be if losing plaintiffs were not penalized), it is possible to discourage relatively low-probability-of-prevailing plaintiffs from suing without discouraging relatively high-probability plaintiffs, and thereby to achieve the desired degee of deterrence with lower litigation costs. This result is developed first in a model in which all suits are assumed to go to trial and then in a model in which settlements are possible.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4507.

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Date of creation: Oct 1993
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Publication status: published as RAND Journal of Economics, Summer 1996, Vol.27, no.2, pp.269-280.
Handle: RePEc:nbr:nberwo:4507

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  1. Gravelle, H. S. E., 1993. "The efficiency implications of cost-shifting rules," International Review of Law and Economics, Elsevier, vol. 13(1), pages 3-18, March.
  2. Katz, Avery, 1990. "The effect of frivolous lawsuits on the settlement of litigation," International Review of Law and Economics, Elsevier, vol. 10(1), pages 3-27, May.
  3. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
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Cited by:
  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.
  2. Bourjade, Sylvain & Rey, Patrick & Seabright, Paul, 2009. "Private Antitrust Enforcement in the Presence of Pre-Trial Bargaining," TSE Working Papers 09-041, Toulouse School of Economics (TSE).
  3. Christopher C. Klein, 2007. "Anticompetitive Litigation and Antitrust Liability," Working Papers 200713, Middle Tennessee State University, Department of Economics and Finance.
  4. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  5. Farmer, Amy & Pecorino, Paul, 1998. "A reputation for being a nuisance: frivolous lawsuits and fee shifting in a repeated play game," International Review of Law and Economics, Elsevier, vol. 18(2), pages 147-157, June.
  6. Echazu, Luciana & Garoupa, Nuno, 2012. "Why not adopt a loser-pays-all rule in criminal litigation?," International Review of Law and Economics, Elsevier, vol. 32(2), pages 233-241.
  7. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
  8. Nuno Garoupa, 2009. "The English rule with payments upfront," Portuguese Economic Journal, Springer, vol. 8(3), pages 177-181, December.
  9. repec:dgr:uvatin:2000103 is not listed on IDEAS

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