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Contracting on litigation

Author

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  • Kathryn E. Spier
  • J.J. Prescott

Abstract

Two risk‐averse litigants with different subjective beliefs negotiate in the shadow of a pending trial. Through contingent contracts, the litigants can mitigate risk and/or speculate on the trial outcome. Contingent contracting decreases the settlement rate and increases the volume and costs of litigation. These contingent contracts mimic the services provided by third‐party investors, including litigation funders and insurance companies. The litigants (weakly) prefer to contract with risk‐neutral third parties when the capital market is transaction‐cost free. However, contracting with third parties further decreases the settlement rate, increases the costs of litigation, and may increase the aggregate cost of risk bearing.

Suggested Citation

  • Kathryn E. Spier & J.J. Prescott, 2019. "Contracting on litigation," RAND Journal of Economics, RAND Corporation, vol. 50(2), pages 391-417, June.
    • Handle: RePEc:bla:randje:v:50:y:2019:i:2:p:391-417
    DOI: 10.1111/1756-2171.12274
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    Cited by:

    1. Baharad, Roy & Cohen, Chen & Nitzan, Shmuel, 2022. "Litigation with adversarial efforts," International Review of Law and Economics, Elsevier, vol. 69(C).
    2. Bernhard Ganglmair & Christian Helmers & Brian J Love, 2022. "The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs [“Valuable Patents]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(3), pages 741-773.
    3. Hylton, Keith N., 2023. "Mutual optimism and risk preferences in litigation," International Review of Law and Economics, Elsevier, vol. 75(C).
    4. Antill, Samuel & Grenadier, Steven R., 2023. "Financing the litigation arms race," Journal of Financial Economics, Elsevier, vol. 149(2), pages 218-234.
    5. Luigi Alberto Franzoni, 2022. "Efficient liability law when parties genuinely disagree," Working Papers wp1176, Dipartimento Scienze Economiche, Universita' di Bologna.

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