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Financing the Litigation Arms Race

Author

Listed:
  • Antill, Samuel

    (Harvard U)

  • Grenadier, Steven R.

    (Stanford U)

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.

Suggested Citation

  • Antill, Samuel & Grenadier, Steven R., 2020. "Financing the Litigation Arms Race," Research Papers 3918, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3918
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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