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Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach

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  • Michael R. Baye
  • Dan Kovenock
  • Casper G. de Vries

Abstract

A simple auction-theoretic framework is used to examine symmetric litigation environments where the legal ownership of a disputed asset is unknown by the court. The court observes only the quality of the case presented by each party, and awards the asset to the party presenting the best case. Rational litigants influence the quality of their cases by hiring skillful attorneys. This framework permits us to compare the equilibrium legal expenditures that arise under a continuum of legal systems. The British rule, American rule, and some recently proposed legal reforms are special cases of our model. ZUSAMMENFASSUNG - (Vergleichende Analyse von Prozeßsystemen: Ein auktionstheoretischer Ansatz) Anhand eines einfachen auktionstheoretischen Ansatzes werden symmetrische Prozeßumwelten untersucht, bei denen der Eigentümer des Streitgegenstandes dem Gericht nicht bekannt ist. Das Gericht kann nur die Qualität der durch die einzelnen Parteien präsentierten Argumente beobachten und dann jener Partei den Vermögenszuschlag geben, die die besten Argumente präsentiert hat. Rationale Prozeßparteien beeinflussen die Qualität ihrer Argumente durch den Einsatz geschickter Anwälte. Der gewählte Ansatz erlaubt es, die im Gleichgewicht entstehenden Prozeßkosten für ein Kontinuum von Rechtssystemen zu vergleichen. Die britische Rechtsregelung, die amerikanische Rechtsregelung und einige jüngst vorgeschlagene Rechtsformen sind Spezialfälle des vorgestellten Modells.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 00-13.

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Length: 45 pages
Date of creation: Nov 2000
Date of revision:
Publication status: Published in Economic Journal , Vol. 115(505), July 2005, pp. 583-601.
Handle: RePEc:wzb:wzebiv:fsiv00-13

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Keywords: Auctions; Contests; Litigation; Fee-Shifting;

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References

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  1. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  2. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Posner, Richard A, 1997. "Explaining the Variance in the Number of Tort Suits across U.S. States and between the United States and England," The Journal of Legal Studies, University of Chicago Press, vol. 26(2), pages 477-89, June.
  4. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
  5. Polinsky, A Mitchell & Rubinfeld, Daniel L, 1998. "Does the English Rule Discourage Low-Probability-of-Prevailing Plaintiffs?," The Journal of Legal Studies, University of Chicago Press, vol. 27(1), pages 141-57, January.
  6. Snyder, Edward A & Hughes, James W, 1990. "The English Rule for Allocating Legal Costs: Evidence Confronts Theory," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 345-80, Fall.
  7. Kathryn E. Spier, 1994. "Pretrial Bargaining and the Design of Fee-Shifting Rules," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 197-214, Summer.
  8. Lucian Arye Bebchuk & Howard F. Chang, 1994. "An Analysis of Fee-Shifting Based on the Margin of Victory: On FrivolousSuits, Meritorious Suits and the Role of Rule 11," NBER Working Papers 4731, National Bureau of Economic Research, Inc.
  9. A. Mitchell Polinsky & Daniel L. Rubinfeld, 1993. "Optimal Awards and Penalties when the Probability of Prevailing Varies Among Plaintiffs," NBER Working Papers 4507, National Bureau of Economic Research, Inc.
  10. Steven A. Matthews, 1995. "A Technical Primer on Auction Theory I: Independent Private Values," Discussion Papers 1096, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Gong, Jiong & McAfee, R Preston, 2000. "Pretrial Negotiation, Litigation, and Procedural Rules," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 218-38, April.
  12. Paul Klemperer, 2000. "Applying Auction Theory to Economics," Economics Series Working Papers 1, University of Oxford, Department of Economics.
  13. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  14. 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.
  15. Hause, John C, 1989. "Indemnity, Settlement, and Litigation, or I'll Be Suing You," The Journal of Legal Studies, University of Chicago Press, vol. 18(1), pages 157-79, January.
  16. Waldfogel, Joel, 1998. "Reconciling Asymmetric Information and Divergent Expectations Theories of Litigation," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 451-76, October.
  17. Hughes, James W & Snyder, Edward A, 1995. "Litigation and Settlement under the English and American Rules: Theory and Evidence," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 225-50, April.
  18. Steven Shavell, 1981. "Suit and Settlement vs. Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs," NBER Working Papers 0662, National Bureau of Economic Research, Inc.
  19. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
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