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The “Rainmaker’s Dilemma:” Bad Debt Loss Insurance in Settlement and Litigation

Author

Listed:
  • Roland Kirstein

    () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Annette Kirstein

    (University of Karlsruhe)

  • Hans Gerhard

    (Saarland University)

Abstract

In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial can turn into a disaster when the defendant goes bankrupt before paying the plaintiff’s claim. “Rainmakers” face the following dilemma: the greater the success, 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, and of buying Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance have different impacts on the predicted 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, may have the opposite effect, as it decreases the settlement result.

Suggested Citation

  • 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.
  • Handle: RePEc:mag:wpaper:08002
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    File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2008_Dateien/2008_02.pdf
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    References listed on IDEAS

    as
    1. Roland Kirstein & Neil Rickman, 2004. ""Third Party Contingency" Contracts in Settlement and Litigation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(4), pages 555-555, December.
    2. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 251-261, April.
    3. van Velthoven, Ben & van Wijck, Peter, 2001. "Legal cost insurance and social welfare," Economics Letters, Elsevier, vol. 72(3), pages 387-396, September.
    4. 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.
    5. 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 1067-1097, September.
    6. 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.
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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.

    More about this item

    Keywords

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

    JEL classification:

    • 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

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