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The optimal adjustment to liability when litigation is costly: A note

Jef De Mot and Thomas J. Miceli

International Review of Law and Economics, 2019, vol. 58, issue C, 127-131

Abstract: We show that the optimal liability award with variable litigation costs may be either larger or smaller than the sum of the victim's harm and litigation costs. The reason is that there are two countervailing effects at play. On the one hand, larger damage awards lead to increased litigation expenditures, which have a dampening effect on optimal damages. On the other hand, variable litigation costs only make sense if the parties anticipate a gain from expending litigation effort, which necessarily translates into a probability of plaintiff victory that is less than one. Consequently, the deterrence function of the trial is mitigated, justifying an upward adjustment in the optimal damage award. The optimal adjustment balances these two effects.

Keywords: Optimal damages; Costly litigation; Rent seeking (search for similar items in EconPapers)
JEL-codes: K13 K41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.irle.2019.03.008

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