Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27163
Authors: 
Stremitzer, Alexander
Year of Publication: 
2008
Series/Report no.: 
Bonn econ discussion papers 2008,2
Abstract: 
We consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff therefore creates a negative externality on the other plaintiffs. It was shown in Che and Spier (2007) that failure to internalize this externality can often be exploited by the defendant. However, if plaintiffs make sequential take-it-or-leave-it settlement offers, we can show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement even having complete information. This may explain why we observe derivative suits in the US but not in Europe.
Subjects: 
litigation
settlement
bargaining
contracting with externalities
derivative suits
public goods
JEL: 
K41
C7
H4
Document Type: 
Working Paper

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