Admissible Third Party Litigation Funding Contracts as a Way to Constrain the Exploitation of Plaintiffs

27 Pages Posted: 7 Mar 2012

See all articles by Ronen Avraham

Ronen Avraham

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law; University of Texas at Austin - School of Law

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: December 17, 2011

Abstract

Third party litigation funders provide non-recourse loans to plaintiffs who repay these loans if and only if they prevail. This means that the interest rates funders charge reflect the funder’s information about the strength of the plaintiff’s case. We analyze a signaling model in which the plaintiff can introduce its funding contract as evidence. If the funder’s information or evaluation is informative, then funder’s have an incentive to signal that the plaintiff has a strong case to increase their chance of recovery. We show that there exists a separating equilibrium in which the funder’s information is fully-revealed. Furthermore, under some conditions, the need to signal forces the funder to charge plaintiffs a lower interest rate and increases the probability of efficient loans taking place.

Keywords: signaling, third party funding

Suggested Citation

Avraham, Ronen and Wickelgren, Abraham L., Admissible Third Party Litigation Funding Contracts as a Way to Constrain the Exploitation of Plaintiffs (December 17, 2011). U of Texas Law, Law and Econ Research Paper No. 242. Available at SSRN: https://ssrn.com/abstract=1986951 or http://dx.doi.org/10.2139/ssrn.1986951

Ronen Avraham (Contact Author)

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law ( email )

Tel Aviv
Israel

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)

HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

Abraham L. Wickelgren

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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