Working Paper: NBER ID: w4507
Authors: A. Mitchell Polinsky; Daniel L. Rubinfeld
Abstract: This article derives the optimal award to a winning plaintiff and the optimal penalty on a losing plaintiff when the probability of prevailing varies among plaintiffs. Optimality is defined in terms of achieving a specified degree of deterrence of potential injurers with the lowest litigation cost. Our main result is that the optimal penalty on a losing plaintiff is positive, in contrast to common practice in the United States. By penalizing losing plaintiffs and raising the award to winning plaintiffs (relative to what it would be if losing plaintiffs were not penalized), it is possible to discourage relatively low-probability-of-prevailing plaintiffs from suing without discouraging relatively high-probability plaintiffs, and thereby to achieve the desired degee of deterrence with lower litigation costs. This result is developed first in a model in which all suits are assumed to go to trial and then in a model in which settlements are possible.
Keywords: litigation; penalties; awards; deterrence; law and economics
JEL Codes: K41; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Imposing a positive penalty on losing plaintiffs (K41) | Discouraging low-probability plaintiffs from filing suits (K41) |
| Imposing a positive penalty on losing plaintiffs (K41) | Number of suits filed (K41) |
| Discouraging low-probability plaintiffs from filing suits (K41) | Reduction in litigation costs (K41) |
| Imposing a positive penalty on losing plaintiffs (K41) | Maintaining deterrence levels (H56) |
| Raising the award for winning plaintiffs and imposing penalties on losing plaintiffs (K41) | Reducing the overall number of frivolous lawsuits (K41) |
| Reducing the overall number of frivolous lawsuits (K41) | Lowering litigation costs (K41) |