A New Theory Concerning the Credibility and Success of Threats to Sue
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Journal of Legal Studies, Vol. 25, pp. 1-25, 1996
Harvard Law and Economics Discussion Paper No. 158
Negative-expected-value (NEV) suits are ones in which the expected litigation costs exceed the expected judgment. This paper offers a new explanation for the credibility and success of plaintiff with NEV suits. The explanation is based on the fact that litigation costs are generally not incurred all at once but rather over time; this divisibility of the litigation process is shown to play a crucial strategic role. The analysis identifies the conditions under which a plaintiff with an NEV suit will have a credible threat and succeed in extracting a settlement. It is demonstrated that plaintiffs have credible threats in a much wider set of cases - including in numerous small-stake cases - than has been suggested by prior economic analysis of the subject.
Number of Pages in PDF File: 27
Keywords: Litigation, suit, settlement, credibility, negative-expected-value suit, frivolous suit
JEL Classification: C70, C79, K4Accepted Paper Series
Date posted: June 22, 2004 ; Last revised: May 8, 2009
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