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Jackpot Justice: The Value of Inefficient Litigation

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  • Zhou, Jun

Abstract

Litigation seems to be a Pareto-ineffcient outcome of pretrial bargaining; however, this paper shows that litigation can be the outcome of rational behavior by a litigant and her attorney. If the attorney has more information than his client concerning the characteristics of the lawsuit, the client can use litigation as a way of extracting information. I show that, counterintuitively, litigation will occur only when the plaintiff is pessimistic about her prospects at trial. Even if the plaintiff could obtain a higher payoff from bargaining than from litigation-without-bargaining, bargaining may not occur in equilibrium. The plaintiff is more likely to sue if she is more pessimistic about winning damage in court and if litigation is more risky. Litigation is less likely to occur if the plaintiff receives third party financing for litigation.

Suggested Citation

  • Zhou, Jun, 2010. "Jackpot Justice: The Value of Inefficient Litigation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 346, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:346
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    References listed on IDEAS

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    6. Holger Sieg, 2000. "Estimating a Bargaining Model with Asymmetric Information: Evidence from Medical Malpractice Disputes," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1006-1021, October.
    7. Strausz, Roland, 2004. "Deterministic versus Stochastic Mechanisms in Principal–Agent Models," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 26, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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    More about this item

    Keywords

    settlement-litigation decision; costs of bargaining; non-bargaining; delegation of dispute resolution; risks of litigation; plaintiff-characteristic dependence; low plaintiff win rates;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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