Abstract

http://ssrn.com/abstract=2195749
 
 

References (28)



 
 

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Embedding Costly Litigation into Repeat Interactions


Scott Baker


Washington University in Saint Louis - School of Law

Albert H. Choi


University of Virginia School of Law

June 17, 2016

Virginia Law and Economics Research Paper No. 2013-02
Washington University in St. Louis Legal Studies Research Paper No. 13-03-01

Abstract:     
The paper analyzes the optimal incentive system when relational sanctions can be supplemented with legal sanctions. A firm sells a good to a sequence of consumers where the firm’s unobservable effort affects the good’s quality. To solve the moral hazard problem, the firm can promise to pay damages (warranty) to consumers, consumers can impose relational sanctions, or both. Both types of sanctions are costly, but legal sanctions have an advantage over relational sanctions. Raising damages creates both marginal (additional lawsuits) and infra-marginal (bigger recovery to existing lawsuits) effects, but increasing relational sanctions lacks the infra-marginal effect. Various extensions, such as litigation’s informational role, a comparison between warranties and damages, the interaction with one long-term buyer, and non-boycott punishment mechanisms (more generous damages or price drop), are also analyzed.

Number of Pages in PDF File: 38

JEL Classification: D86, K12, L14


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Date posted: January 2, 2013 ; Last revised: June 19, 2016

Suggested Citation

Baker, Scott and Choi, Albert H., Embedding Costly Litigation into Repeat Interactions (June 17, 2016). Virginia Law and Economics Research Paper No. 2013-02; Washington University in St. Louis Legal Studies Research Paper No. 13-03-01. Available at SSRN: http://ssrn.com/abstract=2195749 or http://dx.doi.org/10.2139/ssrn.2195749

Contact Information

Scott A. Baker
Washington University in Saint Louis - School of Law ( email )
Campus Box 1120
St. Louis, MO 63130
United States
Albert H. Choi (Contact Author)
University of Virginia School of Law ( email )
580 Massie Road
Charlottesville, VA 22903
United States

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