Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law
December 1, 2009
PROCEDURAL LAW AND ECONOMICS, Chris Sanchirico, ed., 2011
Harvard Law and Economics Discussion Paper No. 656
We review the literature on negative-expected-value suits (NEV suits) – suits in which the plaintiff would obtain a negative expected return from pursuing the suit all the way to judgment. We discuss alternative theories as to why, and when, plaintiffs with NEV suits can extract a positive settlement amount. In particular, we explain how such a plaintiff can extract a positive settlement due (i) asymmetry of information between the parties, (ii) divisibility of the plaintiff's litigation costs, (iii) upfront costs that the defendant must incur before the plaintiff incurs any costs; (iv) expectation that the arrival of information during the course of the litigation may turn the suit into a positive-expected-value one, (5) reputation that enables the plaintiff to bind itself to going to trial if the defendant refuses to settle; or (6) the plaintiff’s having a contingency fee or retainer arrangement with its lawyer.
Number of Pages in PDF File: 12
Keywords: Litigation, settlement, frivolous suits, negative expected value suits, positive expected value suit, divisibility, credibility, fee-shifting, contingent fees, retainer
JEL Classification: K19, K41Accepted Paper Series
Date posted: January 12, 2010 ; Last revised: May 8, 2011
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