Professors Polinsky and Che advocate “decoupling” what plaintiffs recover from what defendants pay in damages. They specifically argue that lowering recovery and raising damages can deliver the same level of deterrence with fewer filed suits. Professors Kahan and Tuckman extend Polinsky and Che’s analysis to account for the fact that parties’ will alter their litigation effort in response to changes in litigation stakes. But Kahan and Tuckman provisionally conclude that modeling litigation effort does not alter Polinsky and Che’s basic argument. This article reaches a different conclusion. We show that when litigation effort is added to the picture, Polinsky and Che’s proposal to lower recovery and raise damages may no longer improve social welfare. We then characterize the kinds of suits in which setting recovery below damages is sub-optimal. Of rhetorical significance for the current policy debate, we find that such suits share many of the empirical premises about litigation that ground conventional arguments in favor of making recovery less than damages. In particular, recovery should be no less than damages in large suits with deep pocket defendants. Our findings are robust to the possibility of out-of-court settlement, plaintiffs’ employment of contingent fee lawyers, and alternative fee-shifting rules.
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Paper provided by EconWPA in its series Law and Economics with number
0403006.
Length: 30 pages Date of creation: 30 Mar 2004 Date of revision: Handle: RePEc:wpa:wuwple:0403006
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Find related papers by JEL classification: C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory D8 - Microeconomics - - Information, Knowledge, and Uncertainty D6 - Microeconomics - - Welfare Economics D7 - Microeconomics - - Analysis of Collective Decision-Making H - Public Economics
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