The Effect of Third-Party Funding of Plaintiffs on Settlement

Andrew Daughety and Jennifer Reinganum ()
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Jennifer Reinganum: Department of Economics and Law School, Vanderbilt University

No 14-00002, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected.

Keywords: Settlement bargaining; litigation funding; non-recourse loan; signaling (search for similar items in EconPapers)
JEL-codes: C7 K4 (search for similar items in EconPapers)
Date: 2014-01-14
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (6)

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Journal Article: The Effect of Third-Party Funding of Plaintiffs on Settlement (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:vuecon-14-00002

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