Showing papers in "The Journal of Legal Studies in 1996"

Explaining Deviations from the Fifty-Percent Rule: A Multimodal Approach to the Selection of Cases for Litigation

Abstract: In their 1984 article, Priest and Klein show that a simple divergent expectations model of the decision to litigate leads to a plaintiff success rate at trial that approaches 50 percent as the fraction of cases going to trial approaches zero. However, an extensive empirical literature has documented that plaintiffs win far fewer than half of their cases. As Priest and Klein observe, this conflict between the predictions of the model and the empirical literature may be attributable to violations in the data of the assumptions behind the simple model. Based on data from 3,529 cases, we find that "multimodal" case characteristics associated with violations of these assumptions cause plaintiff win rates to deviate from the 50-percent baseline in the manner that simple law-and-economics models would suggest. In other words, among cases that conform more closely to the assumptions underlying the simple divergent expectations model, the plaintiff win rate is closer to 50 percent.

Any Frequency of Plaintiff Victory at Trial Is Possible

Abstract: A basic question about litigation concerns the frequency of plaintiff victory at trial and how cases that go to trial relate to settled cases. In a stimulating paper, Priest and Klein advanced a model in which there is a tendency for plaintiffs to prevail at trial with probability 50 percent. However, this note demonstrates that, in a simple, frequently employed model of litigation, it is possible for the cases that go to trial to result in plaintiff victory with any probability. Moreover, given any probability of plaintiff victory at trial, the probability of plaintiff victory among settled cases (had they been tried) may be any other probability. Further, data on the frequency of plaintiff victory does not clearly support the 50 percent tendency. In consequence, this note concludes that it does not seem appropriate to regard 50 percent plaintiff victories as a central tendency, either in theory or in fact.

Context-Dependence in Legal Decision Making

Abstract: Classical theories of choice associate with each option a unique value such that, given an offered set, the decision maker chooses the option of highest value. An immediate consequence is context-independence: the relative ranking of any two options should not vary with the presence or absence of other options. Five experiments reveal two systematic violations of context-independence in legal decision making: the same option is evaluated more favorably when it is intermediate rather than extreme in the offered set (compromise), and the same option is evaluated more favorably in the presence of a similar option that is clearly inferior to it (contrast). Prescriptive implications of context-dependence in legal decision making are discussed.

An Economic Analysis of Uniform State Laws

Abstract: Uniform laws proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) cover virtually every area of state law. Yet there is no economic analysis of the NCCUSL's activities. This article addresses this gap in the literature by applying economic analysis to evaluate and explain the NCCUSL's activities and their success in state legislatures. We find that states efficiently sort between NCCUSL proposals in that they tend to adopt these proposals in which a cost-benefit analysis suggests that uniformity is efficient. Nevertheless, the NCCUSL promulgates many laws in which uniformity is not efficient, and the NCCUSL's influence causes some of these proposals to be adopted. Our results suggest that, in many cases, reliance on federal law or on centralized lawmaking bodies such as the NCCUSL to produce uniformity may be both unnecessary and perverse.

Contingent Fees and Agency Costs

Abstract: In this article, I examine the operation of ordinary linear contingent fees in a model of litigation in which the recovery on a claim is a function of the lawyer's efforts My object here is to analyze the linear fee that maximizes the client's welfare in the presence of attorney moral hazard I identify the optimal fee as the one that minimizes two agency costs: underinvestment in the claim, and attorney rents I also attempt to identify how the optimal linear fee varies with different case characteristics

A New Theory concerning the Credibility and Success of Threats to Sue

Abstract: Negative-expected-value (NEV) suits are ones in which the expected litigation costs exceed the expected judgment. This article offers a new theory for the credibility and success of plaintiffs with NEV suits. The theory is based on recognizing that litigation costs are generally not incurred all at once but rather over time; this divisibility of the litigation process is shown to play a crucial strategic role. The analysis identifies the conditions under which a plaintiff with an NEV suit will have a credible threat and succeed in extracting a settlement. It is demonstrated that plaintiffs have credible threats in a much wider set of cases--including in numerous small-stakes cases--than has been suggested by prior economic analysis of the subject.

Law and Economics and A. W. Brian Simpson

Abstract: THE subject of law and economics when it started in the 1960s presented a difficult problem for the lawyers and economists who had an interest in it. Most lawyers were unfamiliar with the approach of economists and with the concepts they employ. Most economists knew little about the detailed working of the legal system and inevitably found the legal literature difficult to understand because of their unfamiliarity with its vocabulary and its doctrines. That this was the case is quite understandable-it is difficult for most people to be really proficient in more than one subject. Of course, there was Leonardo da Vinci-and there is Richard Posner-but no subject can flourish if it has to depend exclusively or even largely on such exceptionally well endowed individuals. Law and economics consists of two parts which are quite separate although there is a considerable overlap. The first consists of using the economists' approach and concepts to analyze the working of the legal system, often called the economic analysis of law. At the time law and economics started, there had been general movement of economists into the other social sciences, sociology, political science and the like. However, I expressed the view (in 1975) that we should not expect economists \"to continue indefinitely their triumphal advance\"2 into law and the other social sciences. I argued that once these other social scientists \"have acquired the simple but valuable truths which economics has to offer,\" and this I considered to be the natural competitive response, \"economists . . . will have lost their main advantage and will face competitors

The Market for Deadbeats

Abstract: This article outlines three explanations for why states seek migrants and tests them by reference to 1985-90 interstate migration flows. On race-for-the-top theories, states compete for value-increasing migrants by offering them healthy economies and efficient laws. On vote-seeking theories, states compete for clienteles of voters, with some states seeking to attract and some to deter welfare- or tax-loving migrants. On deadbeat theories, states compete for high human capital debtors by offering them a fresh start from out-of-state creditors. Our findings support vote-seeking and deadbeat theories.

On the Degree of Confidence for Adverse Decisions

Abstract: In a criminal trial, the prosecution needs to prove its case beyond a reasonable doubt. When an individual is accused of wrongdoing outside the criminal process, as when teachers and politicians are charged with sexual harassment and employees are charged with financial improprieties, people often assume that a similarly stringent standard of proof applies. Yet this transfer from criminal law model to other settings is mistaken. When the value of freedom from incarceration is absent, and other values are present, probabilities of "guilt" less than "beyond a reasonable doubt," perhaps only a mere possibility, are often socially, statistically, and morally legitimate bases for adverse decisions. Relatedly, although sound reasons for the criminal law's refusal to cumulate multiple low-probability accusations exist, the reasons for such refusal are often inapt in other settings. Taking adverse decisions based on cumulating multiple low-probability charges is often justifiable both morally and mathematically.

An Analysis of Fee-Shifting Based on the Margin of Victory: On FrivolousSuits, Meritorious Suits and the Role of Rule 11

Abstract: When plaintiffs cannot predict the outcome of litigation with certainty, neither the American rule (each litigant bears its own litigation expenses) nor the British rule (the losing litigant pays the attorneys' fees of the winning litigant) would induce optimal decisions to bring suit. Plaintiffs may bring frivolous suits when litigation costs are small relative to the amount at stake; plaintiffs may not bring meritorious suits when litigation costs are large relative to this amount. More general fee-shifting rules are based not only on the identity of the winning party but also on how strong the court perceives the case to be at the end of the trial (the "margin of victory"). We analyze when such a rule can induce plaintiffs to sue if and only if they believe their cases are sufficiently strong. We explore the implications of our analysis for the use of Federal Rule of Civil Procedure 11.

"Bad Faith" Breach of Contract by First-Party Insurers

Abstract: Insurers may at times exploit the delay inherent in the civil litigation process to induce needy insureds to settle for less than the amount that the contract promises. The prospect of extracontractual remedies for such "bad faith" at the end of the litigation process can make these tactics unprofitable and thus serve a potentially valuable function. But the remedy may be worse than the problem, as the courts seem to find bad faith on the part of insurers who have genuine and reasonable disputes with their policyholders over the terms of the policy or over factual issues essential to the insured's right to recover. The ability of the courts to identify opportunistic behavior accurately is thus in doubt, and the possibility arises that bad faith doctrine in first-party cases does little to police misconduct while doing much to cause uneconomic increases in the premiums that policyholders must pay.

Settlement of Litigation under Rule 68: An Economic Analysis

Abstract: Rule 68 of the U.S. Federal Rules of Civil Procedure provides that a plaintiff who refuses a defendant's formal settlement offer and then obtains a judgment not more favorable than the offer must pay the defendant's postoffer costs. An economic analysis is provided (i) to argue that the standard definition of settlement range is not adequate for analyzing Rule 68 because it contains unreasonable, dominated offers, (ii) to present a new definition of the refined settlement range that is adequate for analyzing the effects of Rule 68, and (iii) to propose a revision of Rule 68 to encourage settlements of litigation.

Buyouts in Large Companies

Abstract: We consider legal rules that determine the price at which minority shareholders can be excluded from the corporate enterprise after a change in control These rules affect investment after such a change, as well as the probability of the change itself Our principal results are that minority shareholders should be given the value that their interest would have had were no later investment made and that this rule is best implemented in large companies by awarding the minority the preinvestment market value of their shares The former aspect of our proposal is consistent with much current law but is rejected by many modern law reformers; the latter aspect of our proposal is novel

Damage Multipliers in Market Relationships

Abstract: It is sometimes said that the optimal sanction is the external harm caused by the offense multiplied by one over the probability of punishment. Prior analyses have identified several factors that could raise or lower this optimal multiplier. This article identifies an additional adjustment when victims are customers of the offender and the sanction is paid to victims in the form of damages. In these market relationships, higher sanctions translate into higher prices for customers. If customers are risk-neutral, this will not matter; but if customers are risk-averse, higher sanctions increase the variance of their returns (even if third-party insurance is available). If customers are risk-averse, the optimal number of violations and the optimal quantity of purchases could also change. The net effect could either raise or lower the optimal multiplier, but simulations suggest reductions on the order of 4-40 percent.

Settling Multidefendant Lawsuits: The Advantage of Conditional Setoff Rules

Abstract: In cases involving multiple defendants, each defendant's incentive to settle is influenced by the setoff rule enforced in the relevant jurisdiction. This article suggests that the effect of a setoff rule depends on whether the setoff is conditional on a finding that the settling defendant or defendants were legally liable. Previous research, which assumed that the setoff was unconditional, found that the two principal rules applied by modern courts--the pro tanto and proportionate share rules--often discourage settlement when the plaintiff's probabilities of prevailing against each defendant are not perfectly correlated. This article shows that the disincentive to settlement can be reduced or eliminated by making the setoff conditional on the liability of the settling defendant or defendants. The conditional setoff rules are of practical as well as theoretical interest because several states currently apply them.

Corporal Punishments and Optimal Incapacitation

Abstract: This article extends Steven Shavell's analysis of optimal incapacitation to corporal punishment. Using the assumption that some crimes may involve an undeterrable organ only, I argue that, for these crimes, imprisonment cannot be optimal because it would indiscriminately incapacitate other productive organs. I further establish that the death sentence and other cruel corporal punishments can be abolished for good if advanced temporary incapacitative sanctions are available. I conclude that a reform of criminal punishment need not revert to bloody corporal punishment, build more jails, or lock up criminals for longer periods of time using potential victims' money. Instead, a reform can use temporary incapacitative measures that can target particular organs at fault.