Financing the Litigation Arms Race

Samuel Antill and Steven R. Grenadier
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Samuel Antill: Harvard U
Steven R. Grenadier: Stanford U

Research Papers from Stanford University, Graduate School of Business

Abstract: Using a continuous-time model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous welfare implications. 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 the defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.

JEL-codes: C73 C78 G23 K41 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3918

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