The selection of disputes for litigation

As noted above, most disputes settle before reaching trial, and since settle­ments are private, very little is known about the characteristics of cases that settle compared to those that go to trial.

Using the differing perceptions model, Priest and Klein (1984) advanced the hypothesis that the plaintiff win rate in cases that go to trial will tend to be 50 per cent. This hypothesis is based on the claim that the set of cases that go to trial is not a random sample of all cases, but rather consists disproportion­ately of cases that are a ‘toss-up’. This claim follows from the argument that cases in which one side is a clear winner will result in little disagreement between litigants and will therefore be settled, while cases with no clear winner will result in greater disagreement and hence a higher trial rate. Several analysts have since re-examined the Priest-Klein hypotheses from theoretical, empirical and experimental perspectives and have found evidence for the existence of a bias in trial data but little evidence for the ‘50 per cent rule’.¹⁶ As an example, recall from above that the asymmetric information model predicts that trials will consist primarily of plaintiffs with high prob­abilities of victory (Baird et al., 1994, ch. 8).

Both the differing perceptions and asymmetric information models predict that a trial is more likely the larger are the plaintiff’s damages, all else equal (that is, (26.1) is less likely as J increases). This, combined with the fact that inefficient legal rules by definition produce larger damages than do efficient rules, implies that inefficient rules will be litigated at a higher rate than efficient rules.

Several generalizations of the simple litigation model affect the strength of this hypothesis. First, if the costs of inefficient laws are dispersed rather than concentrated, they may not be litigated more frequently than efficient laws because individual litigants will not fully internalize the social benefits of overturning them. Second, if judicial decision by precedent is important, selective litigation may result in greater entrenchment of inefficient laws over time (Landes and Posner, 1979). Finally, if the parties’ litigation expenditures are endogenous rather than fixed, they will tend to spend more on cases involving higher stakes (Goodman, 1978; Katz, 1988). If judges are respon­sive to litigant expenditures, this effect will tend to magnify the favoured party’s position. Thus, if the relative private returns to the litigants reflect the social benefits, and if the court is not strongly biased by inefficient precedents, this effect will accentuate the tendency of the law to evolve towards efficiency.

Until recently, theoretical models of litigation have largely ignored the role of judges in shaping the evolution of the law (aside from the impact of precedent). This was primarily due to the lack of a good theory of judicial decision making. However, this represents an important gap in our under­standing of the common law process, so researchers have begun to examine the motivation ofjudges, both theoretically (Miceli and Cosgel, 1994; Posner, 1995, ch. 3), and empirically (Higgins and Rubin, 1980; Cohen, 1991).

Notes

* I wish to acknowledge the helpful comments of Steve Shavell.

1. The analysis is similar for disputes involving non-monetary judgments. See Shavell (1993).

2. This is a simplification, since pre-trial bargaining is clearly not costless. However, as long as bargaining is less costly than a trial, the results of the analysis continue to hold.

3. The differing perceptions model of litigation is based on the work of Landes (1971) and Gould (1973). Also see Posner (2003, ch. 21) and Cooter and Rubinfeld (1989).

4. See, for example, Png (1983), Bebchuk (1984, 1988), Reinganum and Wilde (1986) and Nalebuff (1987). Schweizer (1989) considers the case of two-sided incomplete informa­tion, and Spier (1992) explicitly accounts for the dynamics of pre-trial bargaining in the presence of asymmetric information. Baird et al. (1994, ch. 8) compare the differing perceptions and asymmetric information models.

5. Other versions of the asymmetric information model assume that the plaintiff’s costs, Cp, vary, or that the defendant has private information about his cost of trial. See Daughety and Reinganum (1993) for a general analysis of these models. Hylton (1993) shows how differences in Pp and Pd can arise from errors by the court.

6. When the uninformed party makes the offer, the model is one of ‘screening’. In contrast, when the informed party (the plaintiff in this case) makes the offer, the model is one of ‘signalling’ (Daughety and Reinganum, 1993; Baird et al., 1994, ch. 8).

7. For economic models of discovery, see Shavell (1989), Baird et al. (1994; ch. 8), Cooter and Rubinfeld (1994), Hay (1994) and Miceli (1997, ch. 8).

8. See, for example, Shavell (1982a), Katz (1987) and Donohue (1991).

9. The asymmetric information model similarly leads to the prediction that the English Rule leads to fewer settlements (Bebchuk, 1984).

10. Since most cases settle, the value of a claim will depend on the expected settlement amount rather than the expected return at trial.

11. See Miller (1986), Anderson (1994), Spier (1994) and Chung (1996).

12. Whether a lawsuit is settled or goes to trial can have different effects on deterrence. See Polinsky and Rubinfeld (1988).

13. Also see Menell (1983), Kaplow (1986) and Rose-Ackerman and Geistfeld (1987).

14. Also see Rosenberg and Shavell (1985).

15. Experimental evidence can also provide insights (Coursey and Stanley, 1988; Stanley and Coursey, 1990; Thomas, 1995), though this evidence ultimately relies on the underlying theoretical model of bargaining.

16. See, for example, Priest (1985), Wittman (1985), Eisenberg (1990), Stanley and Coursey (1990), Hylton (1993), Thomas (1995), Waldfogel (1995) and Shavell (1996).

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