The Law and Economics of Litigation

This chapter examines the basic model of the law and economics of litigation. Because the Rules of Civil Procedure and the Economics of the Litigation/Settlement decision are covered in separate chapters of this volume, this chapter will focus on private civil litigation, in particular the litigation value of a lawsuit and the incentives generated for filing a suit. The chapter begins with the simple one-stage single plaintiff/single defendant investment model of litigation, and sets out the conditions for filing, default, settlement, and litigation. The analysis then examines the effects of litigation cost and fee‐shifting as well as the effects of percentage contingency fee arrangements within the standard one‐stage model.The model is then modified to take into account sequencing and option value. We show how litigation with multiple stages and the revelation of information alter the investment value of litigation, as well as the effects of litigation reform proposals such as fee‐shifting. Finally, the chapter discusses third party or external effects. We examine how these additional complications affect the outcome of litigation, the viability of a lawsuit and the predictions of the standard model of litigation.This chapter is not intended to be a comprehensive overview of economic analyses of litigation and civil procedure (See Cooter & Rubinfeld (1989), Kobayashi & Parker (2000), Spier (2007)). Rather, this aim of this chapter is to set out the basic mechanics of the law and economics of private civil litigation, and examine how a more robust examination of sequential decision‐making in litigation alters some of the basic predictions of the simple model.