A Note on Optimal Public Enforcement with Settlements and Litigation Costs
14 Pages Posted: 27 Dec 2006 Last revised: 9 Sep 2008
Date Written: December 1986
This note reexamines the theory of optimal public enforcement when litigation costs are incurred if the defendant is prosecuted at trial, and when an out-of-court settlement is possible. Using a numerical example, it is shown that settlements and litigation costs can substantially alter the optimal system of public enforcement. It is also shown that failing to take these considerations into account can significantly lower the achievable level of social welfare.
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