Edited by Jürgen G. Backhaus
Chapter 26: Dispute Resolution
Thomas J. Miceli* Introduction Economists are interested in the resolution of legal disputes for several reasons. First, the manner in which parties resolve their disputes (whether by settlement or trial) has an effect on the cost of operating the legal system. Second, economic theory can explain how parties will resolve their disputes (positive analysis), and can therefore prescribe procedural rules for lowering the cost of dispute resolution (normative analysis). Finally, legal disputes provide the raw material from which courts make new legal rules or reafﬁrm old ones. These rules in turn serve as guides for decisions that affect the rate at which disputes will arise in the future (for example, investment in precaution against accidents). This entry examines the economic analysis of the way legal disputes are resolved. It begins by examining the settlement–trial decision. The analysis shows that settlement will be the predominant outcome given the mutual gain to the parties from avoiding litigation costs. In order to explain the existence of trials, researchers have proposed the existence of differing perceptions or asymmetric information by the parties regarding the outcome of a trial. The resulting models offer insights into various methods for controlling the costs of litigation. In this context, we examine the practice of pre-trial discovery and cost shifting under the English Rule and Rule 68 of the Federal Rules of Civil Procedure. The discussion then turns to the question of whether there is too much litigation from a social perspective, and to various explanations for...
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