Third Party Financing and its Alternatives: An Economic Appraisal

32 Pages Posted: 15 Mar 2016

See all articles by Jef P. B. De Mot

Jef P. B. De Mot

Ghent University

Michael G. Faure

University of Maastricht - Faculty of Law, Metro; Erasmus University Rotterdam (EUR) - Erasmus School of Law

Louis T. Visscher

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics; Erasmus University Rotterdam (EUR) - Erasmus School of Law

Date Written: March 14, 2016

Abstract

In this contribution we provide an economic approach to third party funding. We first explain why third party funding emerges. It can be considered as a remedy for the market failure that can occur in cases of so-called dispersed losses where rational apathy may occur, and also when individuals do not bring claims solely because they do not have sufficient funds. However, we argue that although TPF can help solve market failures, it can create also problems of its own. All the classic economic problems, such as the principal-agent problem, information and transaction costs may jeopardize the effectiveness of TPF. However, we argue that remedies can be designed to increase the effectiveness. We further compare TPF to other mechanisms that could equally cure the market failures, such as legal expenses insurance (LEI) and the transfer of claims. We also briefly compare TPF to contingency fee arrangements, although this is not the central focus of our contribution.

Suggested Citation

De Mot, Jef P. B. and Faure, Michael G. and Visscher, Louis T., Third Party Financing and its Alternatives: An Economic Appraisal (March 14, 2016). Available at SSRN: https://ssrn.com/abstract=2747277 or http://dx.doi.org/10.2139/ssrn.2747277

Jef P. B. De Mot (Contact Author)

Ghent University ( email )

Universiteitsstraat 4
Ghent, 9000
Belgium

Michael G. Faure

University of Maastricht - Faculty of Law, Metro ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands
+31 - 43 - 388 30 60 (Phone)
+31 - 43 - 325 90 91 (Fax)

HOME PAGE: http://www.michaelfaure.be

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

Louis T. Visscher

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics ( email )

Burgemeester Oudlaan 50
PO box 1738
Rotterdam, 3000 DR
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands
+31 (10) 408 1833 (Phone)
+31 (10) 408 9191 (Fax)

HOME PAGE: http://frg.sin-online.nl/staff/index.html?lia=227

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