Presentation on theme: "M. Bayes D. Kovenock C. de Vries The Economic Journal 115, 583-601(2005)"— Presentation transcript:
M. Bayes D. Kovenock C. de Vries The Economic Journal 115, 583-601(2005)
Motivation Difference in suits filed and expenditures between different legal systems. The US is generally viewed as having an excessive number of lawsuits compared to other nations
Motivation What design features lead to lower legal expenditures and fewer lawsuits? Does reducing legal expenditures reduce the social cost of litigation?
Tort Reform in the US In 1991 VP Quayle proposed a modification to the legal system Loser required to pay winner’s legal costs up to own cost level.
Tort Reform in the US 2004 Economic Report of the President Americans spend twice as much on torts than on new automobiles
Figure 1: Tort Expenditures as a Percentage of GDP
Previous Literature Spier (1992) Reinganum and Wilde (1986) Schweizer (1989) Hughes and Snyder (1995)
Previous Literature Spier (1992) Costly for plaintiff to go to court These costs do not influence court decision Plaintiff always wins Amount won is randomly assigned
Previous Literature Reinganum and Wilde (1986) Schweizer (1989) Probability of winning is exogenous Independent of legal expenditures
Previous Literature Reinganum and Wilde (1986) Schweizer (1989) Model is useful for determining incentives to go to court instead of settling out of court
Previous Literature Reinganum and Wilde (1986) Schweizer (1989) Model does not allow comparisons to situations where parties can improve probability of winning Hiring better attorneys Use of expert witnesses
Previous Literature Hughes and Snyder (1995) Optimism Model Exogenous beliefs concerning merit of case These beliefs determine whether parties settle Expected payoffs from trial can be determined
Legal Systems Across the world, variations in legal systems create different contests These contests differ in the costs associated with winning and losing the court case
Legal Systems American Litigants pay own expenses British Loser pays own expenses and all of winner’s Continental Loser pays own expenses and a fraction of the winner’s
Legal Systems Qualye – Loser pays own costs and reimburses winner up to loser’s cost level Marshall – Winner pays own costs and reimburses loser for all of loser’s costs Matthew – Winner pays own expenses and transfers an amount the is proportional to own expenses to loser
Two views of the justice system Winning is determined solely be expenditures Winning is independent of expenditures and is determined solely by the merit of the case presented.
The Model An auction-theoretic model of litigation Each party i has a private valuation v i Valuation is an independent random draw from a distribution function with continuous density Distribution of valuations is common knowledge
Legal Systems Revisited American Litigants pay own expenses British Loser pays own expenses and all of winner’s Continental Loser pays own expenses and a fraction of the winner’s
Legal Systems Revisited Note that the British System is the limit of the Continental System as beta goes to zero
Legal Systems Revisited Qualye – Loser pays own costs and reimburses winner up to loser’s cost level Marshall – Winner pays own costs and reimburses loser for all of loser’s costs Matthew – Winner pays own expenses and transfers an amount the is proportional to own expenses to loser
Proposition 4 While actual expenditures depend on both alpha and beta, expected expenditures are independent of alpha and strictly decreasing in beta. Expected total expenditure (TC) is thus also independent of alpha and decreasing in beta.
Total Expected Expenditures which can be used to create a full ranking of expected total expenditure by legal system
Ranking by total expected expenditure In systems with lower expected total cost, the expected payoff is higher, leading to:
Ranking by expected payoff This ranking is dependent on beta, the amount of his or her own legal expenditures the winner pays.
Tradeoffs in Beta Higher betas result in lower equilibrium expenditures. Higher betas results in higher payoffs, increasing incentive to file lawsuits.
“… systems which generate lower expected expenditures result in higher expected payoffs from litigation, and, therefore, result in more cases being brought to trial”
Incentives to Litigate Modeled as a Prisoner’s Dilemma
American System Litigation dominates conceding for any player with a positive valuation. Ex ante legal outlays are maximized when beta = 1
Ex Ante Legal Outlays Take into account both: Ex post expenditures per trial Incentive to litigate
Conclusions Litigation systems with lower equilibrium legal expenditures per trial provide a greater incentive for parties to file lawsuits than systems with higher equilibrium expenditures
Future Directions Lack of statistics comparing different systems Future research can generate this data Difficulties in cross-cultural comparisons
Future Directions Capture difference in merit of suits: by allowing for asymmetric legal production functions
Future Directions Incorporate work by Che and Gale (1998) on budget constrained players to analyze a more complex type of problem.
Future Directions In any case, there are many ways in which this model can be extended to provide a more detailed picture of the incentives to litigate and the equilibrium characteristics of court cases.
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