The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation
AbstractIn this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial may turn into a disaster when the defendant goes bankrupt. "Rainmakers" face the following dilemma: the greater the success in court, the greater the defendant's bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant's bankruptcy as well as Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance may have different impacts on the outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, can under certain conditions have the opposite effect: it may decrease the settlement result. -- Wir untersuchen, welchen Einfluß Forderungsausfallversicherungen auf das Vergleichsergebnis zwischen den Parteien eines Zivilprozesses nehmen kann. Je größer der Erfolg der Klägerseite in Prozeß oder Vergleich, desto größer ist das Risiko, daß der Beklagte bankrott geht (das "rainmaker's dilemma"). Wir ergänzen ein simples Prozeßmodell mit perfekter und vollständiger Information um diese Bankrottmöglichkeit, und führen Forderungsausfallversicherungen sowohl im Hinblick auf das Vergleichsergebnis ("Vergleichsversicherung") und das Prozeßergebnis ("Prozeßversicherung") ein. Wir zeigen, daß beide Versicherungsarten unterschiedliche Einflüsse auf das Vergleichsergebnis nehmen können. Während die Prozeßversicherung die strategische Situation des Klägers verbessern (also eine "strategische Versicherung" ist), kann die Vergleichsversicherung das Vergleichsergebnis sogar senken.
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Bibliographic InfoPaper provided by Saarland University, CSLE - Center for the Study of Law and Economics in its series CSLE Discussion Paper Series with number 2005-02.
Date of creation: 2005
Date of revision:
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Strategic Insurance; British Cost Allocation Rule; Nash Bargaining Solution;
Other versions of this item:
- Roland Kirstein & Annette Kirstein & Hans Gerhard, 2008. "The “Rainmaker’s Dilemma:” Bad Debt Loss Insurance in Settlement and Litigation," FEMM Working Papers 08002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
- K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Risk-Neutrality and Strategic Insurance,"
CSLE Discussion Paper Series
99-02, Saarland University, CSLE - Center for the Study of Law and Economics.
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- Kirstein, Roland & Rickman, Neil, 2002.
""Third Party Contingency" contracts in settlement and litigation,"
CSLE Discussion Paper Series
2002-11, Saarland University, CSLE - Center for the Study of Law and Economics.
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- Roland Kirstein & Neil Rickman, . "Third Party Contingency contracts in settlement and litigation," German Working Papers in Law and Economics 2002-1-1038, Berkeley Electronic Press.
- Kirstein, Roland & Rickman, Neil, 2003. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series 2003-09, Saarland University, CSLE - Center for the Study of Law and Economics.
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"Judicial detection skill and contractual compliance,"
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- Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial Detection Skill and Contractual Compliance," CSLE Discussion Paper Series 97-07, Saarland University, CSLE - Center for the Study of Law and Economics.
- Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
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