Jackpot Justice: The Value of Inefficient Litigation

Jun Zhou

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: settlement-litigation decision; costs of bargaining; non-bargaining; delegation of dispute resolution; risks of litigation; plaintiff-characteristic dependence; low plaintiff win rates (search for similar items in EconPapers)
JEL-codes: C78 D74 D86 K41 (search for similar items in EconPapers)
Date: 2010-11
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