Plaintiffs Exploiting Plaintiffs

13 Pages Posted: 25 Jan 2008 Last revised: 6 Jul 2010

Date Written: January 21, 2010

Abstract

We consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff therefore creates a negative externality on the other plaintiffs. It was shown in Che and Spier (2007) that failure to internalize this externality can often be exploited by the defendant. However, if plaintiffs make sequential take-it-or-leave-it settlement offers, we can show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement even having complete information. This may explain why we observe derivative suits in the US but not in Europe.

Keywords: litigation, settlement, bargaining, contracting with externalities, derivative suits, public goods

JEL Classification: K41, C7, H4

Suggested Citation

Stremitzer, Alexander, Plaintiffs Exploiting Plaintiffs (January 21, 2010). Yale Law & Economics Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=1085282 or http://dx.doi.org/10.2139/ssrn.1085282

Alexander Stremitzer (Contact Author)

ETH Zurich ( email )

Haldeneggsteig 4
Zurich, 8092
Switzerland
+41 (44) 632 40 08 (Phone)

HOME PAGE: http://www.lawecon.ethz.ch/people/stremitzer.html

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