The 'Rainmaker's Dilemma': Bad Debt Loss Insurance in Settlement and Litigation

17 Pages Posted: 5 Oct 2005

See all articles by Roland Kirstein

Roland Kirstein

University of Magdeburg - Economics of Business and Law

Hans Gerhard

Saarland University

Date Written: June 2005

Abstract

In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial may turn into a disaster when the defendant goes bankrupt. Rainmakers face the following dilemma: the greater the success in court, the greater the defendant's bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant's bankruptcy as well as Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance may have different impacts on the outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, can under certain conditions have the opposite effect: it may decrease the settlement result.

Keywords: Strategic Insurance, British Cost Allocation Rule, Nash Bargaining Solution

JEL Classification: K41, C78, G22

Suggested Citation

Kirstein, Prof. Dr. Roland and Gerhard, Hans, The 'Rainmaker's Dilemma': Bad Debt Loss Insurance in Settlement and Litigation (June 2005). Available at SSRN: https://ssrn.com/abstract=812105 or http://dx.doi.org/10.2139/ssrn.812105

Prof. Dr. Roland Kirstein (Contact Author)

University of Magdeburg - Economics of Business and Law ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany
+493916718729 (Phone)
+493916711764 (Fax)

HOME PAGE: http://www.ww.uni-magdeburg.de/bizecon

Hans Gerhard

Saarland University ( email )

Stadtwald
Saarbrucken, Saarland D-66123
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
129
Abstract Views
1,853
Rank
397,606
PlumX Metrics