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Optimal Awards and Penalties when the Probability of Prevailing Varies Among Plaintiffs

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  • A. Mitchell Polinsky
  • Daniel L. Rubinfeld

Abstract

This article derives the optimal award to a winning plaintiff and the optimal penalty on a losing plaintiff when the probability of prevailing varies among plaintiffs. Optimality is defined in terms of achieving a specified degree of deterrence of potential injurers with the lowest litigation cost. Our main result is that the optimal penalty on a losing plaintiff is positive, in contrast to common practice in the United States. By penalizing losing plaintiffs and raising the award to winning plaintiffs (relative to what it would be if losing plaintiffs were not penalized), it is possible to discourage relatively low-probability-of-prevailing plaintiffs from suing without discouraging relatively high-probability plaintiffs, and thereby to achieve the desired degee of deterrence with lower litigation costs. This result is developed first in a model in which all suits are assumed to go to trial and then in a model in which settlements are possible.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:4507
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    References listed on IDEAS

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    1. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    2. Gravelle, H. S. E., 1993. "The efficiency implications of cost-shifting rules," International Review of Law and Economics, Elsevier, vol. 13(1), pages 3-18, March.
    3. Katz, Avery, 1990. "The effect of frivolous lawsuits on the settlement of litigation," International Review of Law and Economics, Elsevier, vol. 10(1), pages 3-27, May.
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    Cited by:

    1. Michael R. Baye & Dan Kovenock & Casper G. Vries, 2005. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Economic Journal, Royal Economic Society, vol. 115(505), pages 583-601, July.
    2. Nuno Garoupa, 2009. "The English rule with payments upfront," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 8(3), pages 177-181, December.
    3. Farmer, Amy & Pecorino, Paul, 1998. "A reputation for being a nuisance: frivolous lawsuits and fee shifting in a repeated play game," International Review of Law and Economics, Elsevier, vol. 18(2), pages 147-157, June.
    4. Sylvain Bourjade & Patrick Rey & Paul Seabright, 2009. "Private Antitrust Enforcement In The Presence Of Pre‐Trial Bargaining," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 372-409, September.
    5. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
    6. Echazu, Luciana & Garoupa, Nuno, 2012. "Why not adopt a loser-pays-all rule in criminal litigation?," International Review of Law and Economics, Elsevier, vol. 32(2), pages 233-241.
    7. Kaplow, Louis, 2017. "Optimal design of private litigation," Journal of Public Economics, Elsevier, vol. 155(C), pages 64-73.
    8. Innes, Robert, 1999. "Optimal liability with stochastic harms, judgement-proof injurers, and asymmetric information1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 181-203, June.
    9. Christopher C. Klein, 2007. "Anticompetitive Litigation and Antitrust Liability," Working Papers 200713, Middle Tennessee State University, Department of Economics and Finance.
    10. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
    11. Llobet, Gerard, 2003. "Patent litigation when innovation is cumulative," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1135-1157, October.
    12. Gabuthy Yannick & Lambert Eve-Angéline, 2011. "English Rule and Frivolous Suits: Conditional versus Hourly Fees," Review of Law & Economics, De Gruyter, vol. 7(1), pages 72-85, April.

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    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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