Using Costly Litigation in Repeat Interactions
Washington University in Saint Louis - School of Law
Albert H. Choi
University of Virginia School of Law
September 11, 2015
Virginia Law and Economics Research Paper No. 2013-02
Washington University in St. Louis Legal Studies Research Paper No. 13-03-01
The paper analyzes the optimal incentive system when both legal and relational sanctions are imperfect. A firm sells a good to a sequence of consumers where the firm’s unobservable effort affects the good’s quality. To solve the commitment problem, the firm can promise to pay damages or induce relational sanctions. Both types of sanctions are costly, but legal sanctions have an advantage over relational sanctions. While raising damages creates both marginal (additional lawsuits) and infra-marginal incentive effects (bigger recovery to existing lawsuits), raising relational sanctions lacks the infra-marginal effect. Extensions, including litigation’s informational role and warranties, are also examined.
Number of Pages in PDF File: 32
JEL Classification: D86, K12, L14
Date posted: January 2, 2013 ; Last revised: September 12, 2015
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