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Litigation and Settlement under Court Error

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  • Philipp Ackermann

Abstract

Settlements are often considered to be welfare-enhancing because they save time and litigation costs. In the presence of court error, however, this conclusion may be wrong. Court decisions create positive externalities for future litigants which will not occur if a dispute is settled out of court. Focusing on private litigation, we examine the impact of court error on the deterrent effect of the strict liability rule. In an asymmetric information setup both, underdeterrence and overdeterrence are possible under court error. Moreover, court error increases the likelihood of out-of-court settlements which can offset the positive externality of litigation.

Suggested Citation

  • Philipp Ackermann, 2010. "Litigation and Settlement under Court Error," Diskussionsschriften dp1003, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp1003
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    File URL: http://www.vwl.unibe.ch/wp-content/uploads/papers/dp/dp1003.pdf
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    References listed on IDEAS

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    1. van Velthoven, Ben & van Wijck, Peter, 2001. "Legal cost insurance and social welfare," Economics Letters, Elsevier, vol. 72(3), pages 387-396, September.
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    More about this item

    Keywords

    litigation; settlement; asymmetric information; court error; strict liability rule;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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