Financing the Litigation Arms Race

68 Pages Posted: 19 Nov 2020 Last revised: 30 Aug 2021

See all articles by Samuel Antill

Samuel Antill

Harvard Business School

Steven R. Grenadier

Stanford Graduate School of Business

Date Written: November 19, 2020

Abstract

Using a dynamic model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous welfare implications. A defendant and a plaintiff bargain over a settlement payment. The defendant takes costly actions to avoid deadweight losses associated with large transfers to the plaintiff. Litigation financing bolsters the plaintiff, leading to larger deadweight losses. However, by endogenously deterring the defendant from taking costly actions, litigation financing can nonetheless improve the joint surplus of the plaintiff and the defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.

Keywords: law and finance, litigation financing, dynamic bargaining, real options

JEL Classification: C73, C78, G23, K41

Suggested Citation

Antill, Samuel and Grenadier, Steven R., Financing the Litigation Arms Race (November 19, 2020). Stanford University Graduate School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3719238 or http://dx.doi.org/10.2139/ssrn.3719238

Samuel Antill (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Steven R. Grenadier

Stanford Graduate School of Business ( email )

Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

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