Costly Litigation and Optimal Damages

13 Pages Posted: 25 Jan 2012

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2012

Abstract

In this article we examine how the optimal level of damages depends on litigation costs. We assume that litigation costs have a fixed component and a variable component that rises with the level of damages. Our main result is that optimal damages are less than the sum of the victim's harm and the victim's litigation costs - even though damages equal to that sum would internalize the full social cost of an accident. The reason is that lowering damages reduces variable litigation costs. Indeed, optimal damages may be less than harm.

Keywords: costly litigation, optimal damages, liability, litigation costs

JEL Classification: K13, K41

Suggested Citation

Polinsky, A. Mitchell and Shavell, Steven, Costly Litigation and Optimal Damages (January 24, 2012). Available at SSRN: https://ssrn.com/abstract=1990786 or http://dx.doi.org/10.2139/ssrn.1990786

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Steven Shavell

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