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Contracting on litigation
Author(s) -
Spier Kathryn E.,
Prescott J.J.
Publication year - 2019
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12274
Subject(s) - negotiation , settlement (finance) , shadow (psychology) , transaction cost , business , outcome (game theory) , litigation risk analysis , database transaction , third party , capital (architecture) , actuarial science , economics , finance , microeconomics , law , computer science , payment , psychotherapist , history , psychology , programming language , audit , accounting , internet privacy , archaeology , political science
Two risk‐averse litigants with different subjective beliefs negotiate in the shadow of a pending trial. Through contingent contracts, the litigants can mitigate risk and/or speculate on the trial outcome. Contingent contracting decreases the settlement rate and increases the volume and costs of litigation. These contingent contracts mimic the services provided by third‐party investors, including litigation funders and insurance companies. The litigants (weakly) prefer to contract with risk‐neutral third parties when the capital market is transaction‐cost free. However, contracting with third parties further decreases the settlement rate, increases the costs of litigation, and may increase the aggregate cost of risk bearing.