Suit and Settlement vs. Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs

Steven Shavell

NBER Working Paper No. 662
Issued in April 1981
NBER Program(s):   LE

Will a party who believes that he has a legally admissible claim for money damages decide to bring suit? if so, will he subsequently settle with the opposing party or will he go ahead to trial? These questions are analyzed under four methods for allocating legal costs, namely, under the American system, whereby each side bears its own costs; under the "indemnity" or British system, whereby the losing side bears all costs; under the system favoring the plaintiff whereby the plaintiff pays only his own costs if he loses and nothing otherwise; and under the system favor the defendant, whereby the defendant pays only his own costs if he loses and nothing otherwise. Following the analysis, two brief illustrations are considered and comments are made on the relative social desirability of the methods of allocating legal costs.

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Document Object Identifier (DOI): 10.3386/w0662

Published: Shavell, Steven. "Suit and Settlement vs. Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs." Journal of Legal Studies, Vol. 11, No. 1 (January 1982) pp. 55-81.

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