The "Rainmaker's Dilemma": Bad Debt Loss Insurance in Settlement and Litigation
In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial may turn into a disaster when the defendant goes bankrupt. "Rainmakers" face the following dilemma: the greater the success in court, 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 as well as Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance may have different impacts on the 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, can under certain conditions have the opposite effect: it may decrease the settlement result.
|Date of creation:||2005|
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- Roland Kirstein & Neil Rickman, 2004.
""Third Party Contingency" Contracts in Settlement and Litigation,"
Journal of Institutional and Theoretical Economics (JITE),
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- Kirstein, Roland & Rickman, Neil, 2003. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series 2003-09, Saarland University, CSLE - Center for the Study of Law and Economics.
- Kirstein, Roland & Rickman, Neil, 2002. ""Third Party Contingency" contracts in settlement and litigation," CSLE Discussion Paper Series 2002-11, Saarland University, CSLE - Center for the Study of Law and Economics.
- Kirstein, Roland & Rickman, Neil, 2002. ""Third Party Contingency" contracts in settlement and litigation," Berkeley Olin Program in Law & Economics, Working Paper Series qt6vn9877z, Berkeley Olin Program in Law & Economics.
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- Roland Kirstein, 2000.
"Risk Neutrality and Strategic Insurance,"
The Geneva Papers on Risk and Insurance - Issues and Practice,
Palgrave Macmillan, vol. 25(2), pages 251-261, April.
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- 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 1067-97, September.
- 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.
- Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial Detection Skill and Contractual Compliance," CSLE Discussion Paper Series 97-07, Saarland University, CSLE - Center for the Study of Law and Economics.
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