The Effect of Third-Party Funding of Plaintiffs on Settlement

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Working paper
Andrew Daughety and Jennifer Reinganum
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Vanderbilt University
A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about demages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high replayment amount. Pliantiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about hes likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected.
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