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CAN SUITS WITH NEGATIVE EXPECTED VALUE REALLY BE PROFITABLE?

Published online by Cambridge University Press:  08 September 2003

Warren F. Schwartz
Warren F. Schwartz
Affiliation:
Georgetown University Law Center
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This is the second of two closely related articlesThe first is Warren F. Schwartz, Long-Shot Class Actions: Toward a Normative Theory of Legal Uncertainty, 8 LEGAL THEORY 297 (2002). challenging the widely held belief that plaintiffs, through the settlement process, are realizing “too much” from “unmeritorious” claims. No one has offered a systematic justification for this belief. It appears, however, to be based upon the effects produced by three characteristics of the settlement process: (1) the outcome of litigation is uncertain; (2) when, as in a class action, the stakes are very high for a defendant, the defendant will be very risk-averse and will consequently be prepared to pay in settlement much more than the expected value of its liability; and (3) litigation is costly.

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Type
ARTICLES
Information
Legal Theory , Volume 9 , Issue 2 , June 2003, pp. 83 - 97
Copyright
© 2003 Cambridge University Press

Footnotes

I wish to acknowledge my debt to Kevin Lippert for his important contribution to the writing of this article. Kevin, a student in my Law and Economics workshop, wrote a thoughtful paper evaluating the theoretical argument advanced by David Rosenberg and Steven Shavell in their: A Model in which Suits Are Brought for Their Nuisance Value, 5 INT'L REV. L. & ECON. 3 (1985). (The paper was jointly awarded the prize for the best student paper in the workshop). My discussions with Kevin during the course of the semester were largely responsible for my decision to write this article. Moreover, Kevin's paper is the source of important inputs into my analysis of the Rosenberg and Shavell arguments.