Which Law and Economics Model? The Case of Class Action

15 Pages Posted: 27 Aug 2007

See all articles by Donatella Porrini

Donatella Porrini

University of Salento - Department of Economics and Mathematics and Statistics

Date Written: August 22, 2007

Abstract

In this paper following a law and economics approach, we will consider which model can be applied to analyze class action, intended as a procedural device for aggregating a number of similar claims in a single judicial proceeding.

Main examples are environmental and financial class actions with the objective to recover damages affecting dispersed victims. On one hand, many studies about US jurisprudence and about the problems connected with the role of the law firms characterize the legal literature. On the other hand, in Europe the debate is about possible introduction and the problem of harmonization within the judicial systems of different civil law countries (EU the Directive 98/27/EC).

Following an economic approach, class action presents many advantages: class action favors the emergence of efficiency in judicial market, by means of economies of scale; it solves the suboptimal demand of lawsuits by increasing the affordability of legal protection and the possibility of indirect representation; it allocates the risk to the subject in the better positions to manage it because of the utility function because plaintiff are normally risk averse while lawyers are more likely to have a higher risk propensity.

Following a law & economics approach, we will consider the application of economic models to analyze legal devices.

First of all, class action will be analyzed considering a Law and Microeconomics approach using a principal-agent kind of model. Having asymmetric information for the defendants (principal), observing the diligent action (bonding) by the plaintiffs (agent), there exists a monitoring problem and the economic theory suggests solutions in the forms of incentive system.

Then following a second kind of model, Law & Macroeconomics, class action will be analyzed as an instrument of ex post regulation, in comparison with other instruments, such as ex ante and self regulation. Through instruments of regulation ex post there are the possibility for the individuals in the market to sue the managers for their negligent behavior: on this point of view class action can be seen as an instrument of control after the event happens, but with ex ante effects of deterrence on the market efficiency. Class action can be an efficient instrument to protect small investors in the financial market and providing them an economic compensation.

The third model can be called Financial Law and Economics. This perspective is based on the comparison of the level of investors and creditors protection and rights between the legal system of different countries. Class action is an instruments to protect investors together with other instruments as vote power and derivative suits. These legal provisions have an influence on the level and kind of financement for the firms operating in the different economic system of each country.

Finally, we will present some remarks about which approach should be applied to reach different conclusions in terms of efficient policy instruments choice.

Keywords: class action, principal-agent, regulatory instruments, investors' protection

JEL Classification: D82, G32, G38, K22

Suggested Citation

Porrini, Donatella, Which Law and Economics Model? The Case of Class Action (August 22, 2007). Available at SSRN: https://ssrn.com/abstract=1009548 or http://dx.doi.org/10.2139/ssrn.1009548

Donatella Porrini (Contact Author)

University of Salento - Department of Economics and Mathematics and Statistics ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

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