Trial Incentives in Sequential Litigation

Abstract

We analyze when and why trials can emerge in equilibrium when a defendant may sequentially face multiple plaintiffs. Subsequent potential plaintiffs learn about their chances of winning from the initial trial outcome. A trial in the initial case is like an experiment that the defendant can run that would induce plaintiffs’ learning. We show that the initial case can go to trial in equilibrium when a favorable trial outcome for the defense can deter potential future plaintiffs from filing lawsuits. The possibility of non-meritorious lawsuits further raises the attraction of trials. We also show that when the initial plaintiff’s attorney may represent future clients, trials are more likely both because the attorney gains from learning, and because his ability to attract future clients may depend on how much his initial client receives.

Keywords: Trial, Settlement, Multiple Plaintiffs, Sequential Litigation, Learning

JEL Classification: K41