The Fundamental Divergence between the Private and the Social Motive to Use the Legal System
Journal of Legal Studies, Vol. 24, No. 4 (1997).
Posted: 14 Mar 1997
The legal system is a very expensive social institution. Increasingly we read about the growing volume and high cost of suit, and we observe use of various measures to reduce litigation activity, for example, fee-shifting against losing plaintiffs, ceilings on damage awards, and judicial fostering of settlement. At the same time, we encounter certain policies promoting litigation, such as multiplied damage awards and legal aid programs. Against this background, the question naturally arises of what is the socially appropriate amount of litigation. The thesis of the present article is that the level of litigation is not generally socially correct, because of fundamental differences between private and social incentives to use the legal system. These differences permeate the litigation process, affecting decisions about the bringing of suits, settlement versus trial, and legal expenditures.The private-social divergence is attributable to two externalities: When a party makes a decision regarding litigation, he does not take into account the legal costs that he induces others to incur (a negative externality); and neither does he have reason to factor in beneficial effects of his decisions on deterrence or other social purposes of litigation (a positive externality). In consequence, the privately-determined level of litigation can either be socially excessive or socially inadequate, and thus may call for corrective social policies. The article discusses potential corrective policies, including imposition of fees for bringing suit, subsidy of suit and legal aid, levying taxes on defendants and raising their damage payments, fostering settlement, and encouraging trial.
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