Judge's Gate-Keeping Power and Deterrence of Negligent Acts: An Economic Analysis of Twombly and Iqbal

Abstract

Following its landmark decisions in Bell Atlantic v. Twombly and Ashcroft v. Iqbal, the Supreme Court allows federal judges to dismiss cases when the plaintiff's allegations are conclusory or implausible, thereby increasing the judges' discretionary power in pleading stages of litigation. Using a stylized litigation model, I find the conditions under which the ruling improves upon litigation outcomes by simultaneously raising deterrence and reducing litigation costs and error costs. In particular, I demonstrate the ways in which the ruling's effect depends on the correlation between the potential injurers' primary behavior and the strength of cases filed at trial courts.

Keywords: Twombly, Iqbal, deterrence, litigation costs, error costs, perfect Bayesian equilibrium

JEL Classification: C72, D82, K41