The Effect of Third-Party Funding of Plaintiffs on Settlement
AbstractA significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected.
CitationDaughety, Andrew F., and Jennifer F. Reinganum. 2014. "The Effect of Third-Party Funding of Plaintiffs on Settlement." American Economic Review, 104 (8): 2552-66. DOI: 10.1257/aer.104.8.2552
- D82 Asymmetric and Private Information; Mechanism Design
- K41 Litigation Process
- L84 Personal, Professional, and Business Services