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Informational externalities and informational sharing in class action suits

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  • Deffains, Bruno
  • Langlais, Eric

Abstract

When several plaintiffs file individually a lawsuit against the same tortfeasor, the resolution of the various cases through repeated trials produces positive informational externalities, which benefit to the later plaintiffs (since there exist precedents, jurisprudence...). Thus, the first filers may have an incentive to initiate a class action as far as it enables the various plaintiffs to share their information. This feature has not been stressed in the literature, and in contrast strategic uses of class actions have been studied in more details (Che (1996), Marceau and Mongrain (2003)). In this paper, we elaborate on a basic strategic model of litigation settlement, focusing on the interactions between the characteristics of the discovery process (as a general technology of production of evidences) in mass tort litigation, those of the compensation rules set by Courts, and the structure of litigation costs, in order to study when a class action fails to occur, and when sequential trials are more likely. We consider the case of a perfect discovery process. We provide sufficient conditions under which a class action is formed. We show that when victims have heterogeneous claims, the compensatory damages rule awarded by Courts is of major importance for the formation of the class action, whatever the degree of heterogeneity: all else equal, there always exists a degree of \textit{damage averaging} under which the class action occurs. We also show that when contingent fees are used to reward attorneys' services, plaintiffs become neutral to the arrival of new information on their case.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4846.

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Date of creation: 01 Sep 2007
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Handle: RePEc:pra:mprapa:4846

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Keywords: Mass Tort Class Action; information sharing; repeated litigation; contingent fees;

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References

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  1. Che, Yeon-Koo, 1996. "Equilibrium formation of class action suits," Journal of Public Economics, Elsevier, Elsevier, vol. 62(3), pages 339-361, November.
  2. Winand Emons & Nuno Garoupa, 2004. "The Economics of US-style Contingent Fees and UK-style Conditional Fees," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp0407, Universitaet Bern, Departement Volkswirtschaft.
  3. Che, Yeon-Koo & Yi, Jong Goo, 1993. "The Role of Precedents in Repeated Litigation," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 9(2), pages 399-424, October.
  4. Nicolas Marceau & Steeve Mongrain, 2001. "Damage Averaging and the Formation of Class Action Suits," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 139, CREFE, Université du Québec à Montréal.
  5. Lynk, William J, 1994. "The Courts and the Plaintiffs' Bar: Awarding the Attorney's Fee in Class-Action Litigation," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 23(1), pages 185-209, January.
  6. Lynk, William J, 1990. "The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 19(1), pages 247-60, January.
  7. Alon Klement, 2004. "Incentive Structures for Class Action Lawyers," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 20(1), pages 102-124, April.
  8. Emons, Winand, 2004. "Conditional versus Contingent Fees," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4532, C.E.P.R. Discussion Papers.
  9. Winand Emons, 2006. "Playing It Safe with Low Conditional Fees versus Being Insured by High Contingent Fees," American Law and Economics Review, Oxford University Press, vol. 8(1), pages 20-32.
  10. Steven Shavell, 1989. "Sharing of Information Prior to Settlement or Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 183-195, Summer.
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