Information and Externalities in Sequential Litigation
Xinyu Hua, Kathryn E. Spier
NBER Working Paper No. 10943
The information created and disseminated through the litigation process can have social value. Suppose a long-lived plaintiff is suing a defendant for damages sustained in an accident. The plaintiff may suffer similar damages in future accidents involving different defendants. Potential injurers update their beliefs after observing the first case and subsequently fine-tune their precautions to avoid accidents. The joint incentive of the plaintiff and the first defendant to create public information through litigation is too small. The optimal liability rule trades off providing future injurers with incentives to take precautions and providing the plaintiff with incentives to create information.
Published: Hua, Xinyu and Kathryn E. Spier. “Information and Externalities in Sequential Litigation.” Journal of Institutional and Theoretical Economics 161, 2 (2005): 215-232.