Information and Externalities in Sequential Litigation

28 Pages Posted: 14 Jun 2004  

Xinyu Hua

Northwestern University - Kellogg School of Management

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2004

Abstract

The information that is created and disseminated through the litigation process can have social value. When economic agents learn about risks, they can fine-tune their future behaviors to mitigate these risks. Specifically, suppose that an injured plaintiff sues a defendant for damages sustained in an accident. In the future, the plaintiff may be harmed in similar accidents involving different defendants. The first lawsuit creates valuable information that the future defendants can use to fine-tune their investments in accident prevention. If the plaintiff and the first defendant are symmetrically uninformed about the true damages, their private incentive to litigate the first case is too small. If the plaintiff and the first defendant are asymmetrically informed, then the incentive to litigate the first case may be too large. The optimal liability rule trades off the need to provide defendants with incentives to take precautions and to provide the plaintiff with incentives to create valuable public information through litigation.

Keywords: Litigation, Settlement, Externalities, Information, Liability, Incentives

JEL Classification: K00, K13, K41, D83

Suggested Citation

Hua, Xinyu and Spier, Kathryn E., Information and Externalities in Sequential Litigation (May 11, 2004). Available at SSRN: https://ssrn.com/abstract=556163 or http://dx.doi.org/10.2139/ssrn.556163

Xinyu Hua

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Kathryn E. Spier (Contact Author)

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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