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Advantage Defendant: Why Sinking Litigation Costs Makes Negative-Expected-Value Defenses but Not Negative-Expected-Value Suits Credible

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  • Warren F. Schwartz
  • Abraham L. Wickelgren

Abstract

We revisit Lucian Bebchuk's 1996 claim that plaintiffs can use the sequential nature of litigation to extract a positive settlement from a negative-expected-value suit. We make three claims. First, this result is heavily dependent on the specific bargaining game he uses. Second, in an alternating-offer bargaining game, the outside-option principle demonstrates that this cost-sinking strategy will not allow a negative-expected-value plaintiff to extract a positive settlement offer. Third, this cost-sinking strategy, however, can be effective for a defendant using a negative-expected-value defense. (c) 2009 by The University of Chicago. All rights reserved.

Suggested Citation

  • Warren F. Schwartz & Abraham L. Wickelgren, 2009. "Advantage Defendant: Why Sinking Litigation Costs Makes Negative-Expected-Value Defenses but Not Negative-Expected-Value Suits Credible," The Journal of Legal Studies, University of Chicago Press, vol. 38(1), pages 235-253, January.
    • Handle: RePEc:ucp:jlstud:v:38:y:2009:i:1:p:235-253
    DOI: 10.1086/587144
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Avner Shaked & John Sutton, 1984. "The Semi-Walrasian Economy," STICERD - Theoretical Economics Paper Series 98, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    3. Rosenberg, D. & Shavell, S., 1985. "A model in which suits are brought for their nuisance value," International Review of Law and Economics, Elsevier, vol. 5(1), pages 3-13, June.
    4. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    5. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 753-770.
    6. Katz, Avery, 1990. "The effect of frivolous lawsuits on the settlement of litigation," International Review of Law and Economics, Elsevier, vol. 10(1), pages 3-27, May.
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    Cited by:

    1. Margherita Saraceno, 2018. "Justice: Greater Access, Lower Costs," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(2), pages 283-312, July.
    2. Farmer Amy & Pecorino Paul, 2014. "Litigation with Default Judgments," Review of Law & Economics, De Gruyter, vol. 10(2), pages 117-136, July.
    3. Giorgio Rampa & Margherita Saraceno, 2014. "Beliefs and Precedent: The Dynamics of Access to Justice," DEM Working Papers Series 084, University of Pavia, Department of Economics and Management.
    4. Guha, Brishti, 2016. "Malicious litigation," International Review of Law and Economics, Elsevier, vol. 47(C), pages 24-32.
    5. Matteo Migheli & Margherita Saraceno, 2023. "On the propensity to settle or litigate in laboratory disputes," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(2), pages 615-642, July.
    6. Warren F. Schwartz & Abraham L. Wickelgren, 2009. "Credible discovery, settlement, and negative expected value suits," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 636-657, December.

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