Agreements to Waive or to Arbitrate Legal Claims: An Economic Analysis
Posted: 21 Mar 2000
Date Written: November 1999
As arbitration agreements have grown in use, they have become controversial, with many critics describing them as a disguised form of waiver. This paper presents an economic analysis of waiver and arbitration agreements. I examine the conditions under which parties have an incentive to enter into these types of agreement, and their welfare implications. Waiver and arbitration agreements are similar, in the sense that one can view a waiver as a special type of arbitration agreement in which litigation costs are zero and the plaintiff always loses.
I show that if parties are well informed, they will enter into waiver agreements when (and only when) litigation is socially undesirable, in the sense that the deterrence benefits provided by the threat of litigation fall short of litigation costs. Under similar conditions, they will enter into arbitration agreements when (and only when) the margin between deterrence benefits and dispute resolution costs is larger under the arbitral regime. These results suggest that a presumpton in favor of enforcement these agreements should be adopted, especially where parties are informed. I discuss exceptions to this presumption, largely based on informational disparities. I use the theory developed here to critically examine well known arguments against arbitration agreements, such as the claim that these agreements inhibit the development of new law.
Although the focus here is on waiver and arbitration agreements, the analysis has broader implications for the literature on the social desirability of litigation and lawyering activity generally. The key implication is that the answer to socially undesirable litigation is not a wholesale reduction in the amount of litigation or the number of lawyers, but an expansion of "markets" in waiver and arbitration agreements.
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