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Andrew Daughety and Jennifer Reinganum
''The Effect of Third-Party Funding of Plaintiffs on Settlement''
A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, 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 repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his 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.
Keywords: Settlement bargaining, litigation funding, non-recourse loan, signaling
JEL: K4 - Legal Procedure, the Legal System, and Illegal Behavior: General
C7 - Game Theory and Bargaining Theory: General
Manuscript Received : Jan 14 2014 Manuscript Accepted : Jan 14 2014

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