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Risk Neutrality and Strategic Insurance

  • Roland Kirstein

    (Center for the Study of Law and Economics, Universitat des Saarlandes, D-66041 Saarbrucken)

The paper shows that Legal Cost Insurance (LCI) is a device to enhance potential litigants? bargaining position rather than to re-allocate risk. Being insured decreases the cost an insured party has to bear if settlement negotiations fail and the case goes to trial. This shifts the threat points, which has an impact on the bargaining result. In negative expected value suits, LCI can make the threat to sue credible and motivate potential defendants to make positive settlement offers. Hence, even risk-neutral agents may find it beneficial to insure.

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Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance.

Volume (Year): 25 (2000)
Issue (Month): 2 (April)
Pages: 251-261

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Handle: RePEc:pal:gpprii:v:25:y:2000:i:2:p:251-261
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