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The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation

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  • Kirstein, Roland
  • Gerhard, Hans

Abstract

In 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 Info

Paper provided by Saarland University, CSLE - Center for the Study of Law and Economics in its series CSLE Discussion Paper Series with number 2005-02.

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Date of creation: 2005
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Handle: RePEc:zbw:csledp:200502

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Web page: http://www.uni-saarland.de/fak1/fr12/csle/
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Related research

Keywords: Strategic Insurance; British Cost Allocation Rule; Nash Bargaining Solution;

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References

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  1. Kidwell, David S. & Sorensen, Eric H. & Wachowicz, John M., 1987. "Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 299-313, September.
  2. Kirstein, Roland, 1999. "Risk-Neutrality and Strategic Insurance," CSLE Discussion Paper Series 99-02, Saarland University, CSLE - Center for the Study of Law and Economics.
  3. 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.
  4. 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.
  5. Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial detection skill and contractual compliance," International Review of Law and Economics, Elsevier, vol. 17(4), pages 509-520, December.
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Cited by:
  1. 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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