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Plaintiffs exploiting Plaintiffs

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  • Stremitzer, Alexander

Abstract

We consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff therefore creates a negative externality on the other plaintiffs. It was shown in Che and Spier (2007) that failure to internalize this externality can often be exploited by the defendant. However, if plaintiffs make sequential take-it-or-leave-it settlement offers, we can show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement even having complete information. This may explain why we observe derivative suits in the US but not in Europe.

Suggested Citation

  • Stremitzer, Alexander, 2008. "Plaintiffs exploiting Plaintiffs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 224, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:224
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    File URL: https://epub.ub.uni-muenchen.de/13328/1/224.pdf
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    References listed on IDEAS

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    1. Kathryn E. Spier, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 93-108.
    2. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    3. Yeon-Koo Che & Kathryn E. Spier, 2008. "Exploiting Plaintiffs through Settlement: Divide and Conquer," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 4-23, March.
    4. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
    5. Romano, Roberta, 1991. "The Shareholder Suit: Litigation without Foundation?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 55-87, Spring.
    6. repec:hrv:faseco:30747162 is not listed on IDEAS
    7. Oren Bar-Gill, 2006. "The Evolution and Persistence of Optimism in Litigation," Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(2), pages 490-507, October.
    8. Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Grechenig, Kristoffel & Sekyra, Michael, 2011. "No derivative shareholder suits in Europe: A model of percentage limits and collusion," International Review of Law and Economics, Elsevier, vol. 31(1), pages 16-20, March.

    More about this item

    Keywords

    litigation; settlement; bargaining; contracting with externalities; derivative suits; public goods;

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • H4 - Public Economics - - Publicly Provided Goods

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