Litigation with Judgment Proof Defendants

Abstract

We consider a model of litigation in which some defendants have insufficient assets to pay a judgment at trial. Because the defendant’s assets are not observable, this serves as a source of asymmetric information which leads to trials in the equilibrium of the model. Unlike many other types of informational asymmetry, the defendant’s assets are not generally subject to discovery and it may be difficult to credibly establish a lack of assets in a voluntary disclosure. Thus, this is a source of asymmetry between the parties which is likely to persist in the presence of these institutions. This suggests that this particular asymmetry is a potentially important explanation for settlement failure, at least in a subset of cases. We describe three possible equilibria in the model with asset constrained defendants. One equilibrium is consistent with high dispute rates between the plaintiff and defendant. The model suggests that fee shifting will either have no effect on the incidence of trial or will increase it.

Keywords: Judgment Proof Defendant, Pretrial Bargaining, Asymmetric Information, fee shifting at trial

JEL Classification: K41, D82, C78