Third Party Litigation Funding with Informative Signals: Equilibrium Characterization and the Effects of Admissibility

39 Pages Posted: 21 Aug 2018

See all articles by Ronen Avraham

Ronen Avraham

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law; University of Texas at Austin - School of Law

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: August 2018

Abstract

Litigation funders provide non-recourse loans to plaintiffs who repay these loans if and only if they prevail. The loan's interest rate reflects the funder's information about the strength of the plaintiff's case. We analyze a monopoly and a two-firm Bertrand model. Bertrand competition does not eliminate funder profits or ineffciency. Making the funding contract admissible evidence enables the funder to increase its chance of recovery by reducing the interest rate to signal to the court that the plaintiff has a strong case. Under monopoly, there is only a separating equilibrium without admissible funding. With admissible funding, there is either a pooling equilibrium or a separating equilibrium, but either increases the joint welfare of plaintiffs and funders. Under Bertrand competition, admissible funding increases joint welfare if court's can make adverse inferences from the absence of funding contracts. Plaintiffs are generally better off under admissibility if they discount the future sufficiently.

Suggested Citation

Avraham, Ronen and Wickelgren, Abraham L., Third Party Litigation Funding with Informative Signals: Equilibrium Characterization and the Effects of Admissibility (August 2018). Journal of Law and Economics, Forthcoming; U of Texas Law, Law and Econ Research Paper No. e521. Available at SSRN: https://ssrn.com/abstract=3236454 or http://dx.doi.org/10.2139/ssrn.3236454

Ronen Avraham (Contact Author)

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law ( email )

Tel Aviv
Israel

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)

HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

Abraham L. Wickelgren

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
368
Abstract Views
1,756
rank
79,417
PlumX Metrics