Presentation on theme: "Economics of the Legal Process. Car Accident I hit you with my car and cause $10,000 in damages We both believe that there’s an 80% chance I’ll be."— Presentation transcript:
Car Accident I hit you with my car and cause $10,000 in damages We both believe that there’s an 80% chance I’ll be held liable if we go to trial Suppose going to trial cost each of us $3000 There’s room to negotiate a settlement You expect to recover: (0.80)($10,000) = $8000 Your net gain from going to trial = $8000 - $3000 = $5000 My expected cost of going to trial = $8000 + $3000 = $11,000
Car Accident What if one of us has private information? Suppose I’m more pessimistic about a trial’s outcome? Suppose I’m more optimistic about a trial’s outcome? P(liable) = 90% P(liable) = 10% Settlement more likely Settlement less likely
The Legal Process Previous assumptions: Legal system works flawlessly Legal system is costless Objective: Min Social Costs = c a + c(e) Damages = Actual Harm Administrative costsCost of errors Wrong precaution levels Wrong activity levels
A Legal Decision Tree Injury? Sue? Settle or Exchange info? Bargain Trial Appeal end win lose yes no settle Don’t settle info What is the value of a legal claim? Handout
Determining the # of Suits The # of legal claims filed depends on: # injuries Cost of filing a complaint Expected value of a legal claim Damages Awarded Number of claims filed What does the relationship look like?
Determining the # of Suits Higher FC means: Fewer lawsuits and lower c a Larger # of injuries go unpunished, therefore higher c(e) EVC Number of potential plaintiffs FC Class Action lawsuits? Appropriate where individual harms are small but aggregate harms are large suedon’t sue
Client – Lawyer Problems Asymmetric info Lawyer knows the law Client knows the facts Optimal payment system Hourly pay? Per service charge? Contingency fee?
Exchange of Information Pre-trial “discovery” phase Voluntary pooling of info Parties tend to reveal info that corrects the other side’s relative optimism Parties tend to withhold info that corrects the other side’s relative pessimism Involuntary pooling of info Correcting relative pessimism makes settlement less likely But it does reduce overall uncertainty which makes settlement more likely You reveal your medical x-rays to show severe damages Was that crunching sound a broken hip? US vs Europe Impact on social costs?
Pre-Trial Bargaining Plaintiff will accept settlement S if: S > EJ P – LC P Defendant will offer settlement S if: S < EJ D + LC D What does a “reasonable” settlement look like? Where: S = settlement EJ P = expected judgment LC P = litigation costs S > $8000 - $3000 = $5000 S < $8000 + $3000 = $11,000
Trial Europe: inquisitorial system US: adversarial system Who pays the costs of trials? US: each side pays their own costs United Kingdom: loser pays all costs “Judges have incentives to do what is right and easy; lawyers have incentives to do what is profitable and hard.”
Trial Unitary trials: liability and damages Segmented trials: liability then damages Burden of proof Criminal cases: “innocent until proven guilty” Civil cases: plaintiff typically has burden Standard of proof Civil cases: “preponderance of the evidence” Criminal cases: “beyond a reasonable doubt”
Appeal Federal courts: District courts (94) Circuit courts of appeal (12) Supreme Court Matters of law vs Matters of fact Impact on social cost: c a + c(e) “right of appeal” “discretionary review”