Deterrence and Aggregate Litigation

Abstract

This paper examines the deterrence properties of aggregate litigation and class actions. In the multiple victim scenario, the probability that an individual victim will sue falls toward zero with geometric decay as the number of victims increases. The reason is that the incentive to free ride increases with the number of victims. Undercompliance is observed, which worsens with the number of victims. Compliance is never socially optimal, and the shortfall from optimality increases with the number of victims. These results, which continue to hold even if litigating victims anticipate being joined in a single forum, suggest a more nuanced and potentially more robust justification for the class action than has hitherto been provided. Implications for collusive settlements of class action litigation are discussed.

Keywords: class action, aggregate litigation, positive value claims, negative value claims, deterrence, legal compliance, litigation, joinder, limited fund, monitoring class actions, opting out

JEL Classification: K40, K41, K42, K22, D74