A New Theory Concerning the Credibility and Success of Threats to Sue

27 Pages Posted: 22 Jun 2004 Last revised: 8 May 2009

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Date Written: 1996

Abstract

Negative-expected-value (NEV) suits are ones in which the expected litigation costs exceed the expected judgment. This paper offers a new explanation for the credibility and success of plaintiff with NEV suits. The explanation is based on the fact that litigation costs are generally not incurred all at once but rather over time; this divisibility of the litigation process is shown to play a crucial strategic role. The analysis identifies the conditions under which a plaintiff with an NEV suit will have a credible threat and succeed in extracting a settlement. It is demonstrated that plaintiffs have credible threats in a much wider set of cases - including in numerous small-stake cases - than has been suggested by prior economic analysis of the subject.

Keywords: Litigation, suit, settlement, credibility, negative-expected-value suit, frivolous suit

JEL Classification: C70, C79, K4

Suggested Citation

Bebchuk, Lucian A., A New Theory Concerning the Credibility and Success of Threats to Sue (1996). Journal of Legal Studies, Vol. 25, pp. 1-25, 1996; Harvard Law and Economics Discussion Paper No. 158. Available at SSRN: https://ssrn.com/abstract=557243

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

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