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1
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84914381319
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It will be obvious that the qualitative nature of our conclusions would not be altered were we to allow the default and trial judgment amounts to diffe
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2
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84914381318
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The assumption that parties evaluate uncertain prospects in terms of their expected values —that they are ‘risk neutral’—is made for simplicity. It will be evident from the logic of the arguments to be made that nothing of importance to us would be changed were we to assume that parties are ‘risk averse’ and to take into account not only the expected value but also the degree of risk. For an introductory treatment of risk aversion, risk neutrality, and decision theory generally, see
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4
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84914381317
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If, however, the amount the plaintiff would obtain in a judgment were less than $200, say $50, then, clearly, the defendant would accept demands only up to $50. More generally, in the situation where the plaintiff would not litigate, the defendant would accept settlement demands up to his costs of defense or the judgment amount, whichever is lower.
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5
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84914381316
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Referring to note 3, supra, it is clear that were the judgment amount only $50, then since the defendant would pay at most this amount, the plaintiff would file a claim only when the filing costs are less than $50. More generally, in the situation where the plaintiff would not litigate, he will file a claim when the cost of so doing is less than the minimum of the defendant's costs of defense and the judgment amount.
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6
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84914381315
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Observe as well that the plaintiff need not actually file his claim to be able to obtain a settlement from the defendant; it is enough that he would be willing to do so. That is, suppose we modify the model slightly to accommodate the possibility that the plaintiff could make his demand before he filed a claim. Then the defendant might be imagined to settle with the plaintiff at that point-though for somewhat less, reflecting the cost of filing-knowing that the plaintiffs threat otherwise to file a claim would be credible. See the remark about this at the end of Section III.
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7
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84914381314
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More generally, and as in previous notes, he can obtain in settlement any amount up to the minimum of this and the judgment amount.
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8
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84914381313
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See
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9
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0011040906
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Winner Takes All: A Re-Examination of the Indemnity System
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for an informal analysis of the British system; this is the prevailing method for allocation of litigation costs in the UK (although as a practical matter it usually does not result there in full indemnification of the winner). For formal analysis of the shifting of litigation costs using economic models of the litigation process, see
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(1969)
Iowa L. Rev.
, vol.55
, pp. 26
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Mause1
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11
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0002844329
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Suit Settlement and Trial A Theoretical Analysis Under Alternative Methods for the Allocation of Legal Costs
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and see L. Bebchuk, ‘An Analysis of Litigation and Settlement Under Imperfect Information,’ forthcoming in Rand J. Econ.
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(1982)
The Journal of Legal Studies
, vol.11
, pp. 55
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Shavell1
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12
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84914381312
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The meaning of ‘low’ here is shown in the next section to be less than b/(a+b), where a is the plaintiff's litigation costs and b the defendant's defense costs. Thus in our first example, a low likelihood is one less than $200/$300 or 662/3 per cent.
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13
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84914381311
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We thus restrict attention to pure strategies.
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14
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0000558986
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Sequential Equilibria
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for the general definition of a sequential equilibrium; the general definition specializes to the one we have given in the simple game we are considering.
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(1982)
Econometrica
, vol.50
, pp. 863
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Kreps1
Wilson2
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15
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84914381310
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To simplify the statement of results here and later, we will assume that where the plaintiff would be indifferent between engaging in litigation and not, he would do so; and where he would be indifferent between filing a claim and not, he would do so.
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16
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84914381309
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As observed in the last section, pw < a can hold for high w if p is sufficiently low (the typical nuisance suit), or for high p if w is sufficiently low (the meritorious suit not worth bringing).
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17
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84914381308
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Note that we therefore are assuming that if the plaintiff prevails he does not recover his cost of filing ƒ. It will be obvious, however, that were we to alter this assumption, our results would not be materially changed.
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18
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84914381307
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For it is easily verified that if p 〉 b/(a〉 + b), then a 〉 (1-p)(a +b), so that (6) holds more often than (3). Ess
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19
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84914381306
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But this need not be true, for as we have stressed, the plaintiff may decide to file a claim under the American system even when he would be unwilling to litigate.
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20
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84914381305
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Since in this case a ⩽ (1 − p)(a + b), (6) holds less often than (3).
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21
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84914381304
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To prove this, suppose that the plaintiff would file a claim under the British system, and let us show that he would also file under the American. Since he would file under the British, it must be that (6) and (7) hold. But as we observed in the last note, (6) implies (3); and it is easily verified that (7) implies (4). Hence, the plaintiff would file under the American system.
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22
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84914381303
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This follows because, first, when the plaintiff is willing to litigate under the British system, he obtains min(p, a + b + w),w) and under the American, min(b + pw,w). And second, p(a + b + w) 〉 b + pw if and only if p 〉 b/(a + b).
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25
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84914381302
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and Shavell, note 7, supra.
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26
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84914381301
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In Massachusetts, for example, the fee for filing a civil suit is $55 in state court and $60 in federal court. But of course, the total cost of filing a claim includes also the cost of attorney services.
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27
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84914381300
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Although under Fed.R.Civ.P. 11 courts can (and as recently amended, shall) impose sanctions, including attorneys' fees, against a party whose pleading is not ‘well grounded in fact and … warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law,’ they have been loath to do so see
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-
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28
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0006680560
-
-
West, for a plaintiff can almost always discover an arguably reasonable basis for a suit. And in cases in which state laws apply, there is the additional problem that some states will award attorneys' fees only when the defendant can demonstrate some ‘special injury’ other than the normal expense and aggravation that attend the defense of a lawsuit. See 52 Am. Jur.2d Malicious Prosecution §§10–11 (1970 & supp. 1983). Also, while the A.B.A. Code of Professional Responsibility prohibits a lawyer from ‘asserting a position in litigation that is frivolous,’ E.G. 7-4, it may be questioned whether this stricture has had much effect.
-
(1969)
Federal Practice and Procedure §1334
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Wright1
Miller2
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29
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84914381299
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See Fed.R.Civ.P. 55 and state rules of procedure concerning default judgments.
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30
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84914381298
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The defendant's only relatively inexpensive means of defending himself is a motion to dismiss (filed under Fed.R.Civ.P. 12, b)(6) or the appropriate state rule). A sufficiently skilled plaintiff can draft a complaint which will survive such a motion, so that the defendant must then turn to a summary judgment motion. Summary judgment will be obtained only if the defendant marshalls evidence to defeat the plaintiffs claim, and such evidence can usually be gathered only at considerable expense.
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31
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84914381297
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More precisely, suppose that the model is modified as follows. If the defendant does not settle, one possibility is that he spends a small amount in defense, in which case the plaintiff prevails with high probability (corresponding to the branch in Figure 1 where the plaintiff wins by default judgment). The other possibility is that the defendant spends a large amount in defense, in which case the plaintiff prevails with a low probability if he spends no more (corresponding to the branch where he withdraws), but prevails with a higher probability if he spends an additional amount (corresponding to the branch where the plaintiff litigates). It should be clear to the reader that this modified model could be solved virtually as we solved ours, and that the results would be analogous to ours.
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32
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84914381296
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In fact, concern about ‘use of discovery … as a device to coerce a party’ led to recent amendments to Fed.R.Civ.P. 26, which now authorizes courts to limit discovery and to impose sanctions, including attorneys' fees. See also Fed.R.Civ.P. 26 advisory committee note.
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33
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84914381295
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Assume, for instance, that the defendant faces the prospect of 1000 nuisance suits; that facts relevant to the defense in all such suits would cost $20000 to prepare; and that issues specific to each case would involve only $50 in defense costs to develop. Then the average cost of defense would be only $20 + $50 = $70, and if the plaintiffs cost of filing (plus his time and effort) exceeded this amount, he would not bother to file a claim. See D. Rosenberg, ‘The Causal Connection in Mass Exposure Cases: A “Public Law Vision” of the Tort System,’ (1984) 97 Harv. L.R. 849, for a discussion of this point.
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34
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84914381294
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There is reason to believe that conditional on a claim being filed, the likelihood of litigation would be higher under the British system than under, Shavell, note 7, supra.
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35
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84914381293
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and Bebchuk, note 7, supra.
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36
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84914381292
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In addition to the papers cited in notes 7 and 19, supra, see
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41
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84914381290
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In P'ng, note 28, supra, nuisance suits occur, but only because (as is admitted) it is assumed that plaintiffs successfully make threats to go to t
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