Class Action Suits in Domestic Production, Smuggling, and the Non-Equivalence Between Tariffs and Quotas

Class action suits are a legal device by which similarly injured individuals can collectively obtain compensation through the justice system. Damage averaging occurs when the compensation awarded by the court to individual members is partly or completely determined by the average damage of the class. This paper examines two dimensions of the impact of damage averaging on class action suits. First, when opting out is permitted, a semi-separating (adverse selection) equilibrium may exist in the presence of pretrial settlement offers to individual suit plaintiffs and/or to class action suit plaintiffs if the degree of damage averaging satisfies certain conditions. Second, the key role of damage averaging in influencing the identity of the individual that will initiate the class action suit is illustrated in a waiting game. If there is complete averaging, the individual with the lowest damage will initiate the class action suit. On the other hand, if there is no damage averaging, either the one with the highest or the one with the lowest damage will do so.