Financing the litigation arms race

Samuel Antill and Steven R. Grenadier

Journal of Financial Economics, 2023, vol. 149, issue 2, 218-234

Abstract: Using a dynamic real-option model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous implications for total ex-post litigant surplus. A defendant and a plaintiff bargain over a settlement payment. The defendant takes costly actions to avoid deadweight losses associated with large transfers to the plaintiff. Litigation financing bolsters the plaintiff, leading to larger deadweight losses. However, by endogenously deterring the defendant from taking costly actions, litigation financing can nonetheless improve the joint surplus of the plaintiff and defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.

Keywords: Real options; Litigation financing; Third-party litigation funding; Dynamic bargaining (search for similar items in EconPapers)
JEL-codes: C73 C78 G23 K41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:2:p:218-234

DOI: 10.1016/j.jfineco.2023.05.004

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