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While all legal systems implement a form of pre-judgment or post-judgment interest, there is a dearth of literature on substantive law and economics analysing the impact, functioning, and assessment of the judicial interest rate. Current legal scholarship typically views the interest rate as having a neutral effect on private and social costs. This paper demonstrates that the issue is theoretically far more complex and largely influential in legal policy. Due to the asymmetric opportunity costs for each party in a case, judicial interest rates may lead to improper delay of proceedings or the decoupling of damages from recovery. These potential results influence the number of settlements and suits. On this ground, we compare different institutional settings from an economic perspective and conclude that the appropriate mechanism depends on the alternative policy instruments available, namely, the rules of procedure, court fees, or mechanisms for appropriately setting damages. Further, we argue that abolishing the statute which sets pre-judgment interest may be a proposal worth considering.

journal of european tort law

On the Judicial Interest Rate: Towards a Law and Economic Theory  The authors are grateful to three anonymous referees, the editor, Ken Oliphant, as well as Francisco Ramos Romeu and AEDE (Spanish Law and Economics Association, Barcelona, 2011) and ALACDE (Latin American Law and Economics Association, Bogota, 2011) participants for useful comments. Caroline Belloff, Melissa Marrero and Roya H Samarghandi have provided excellent research assistantship. The usual disclaimers apply.