In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (e.g., the American rule and English rule with limited fee-shifting) affect parties’ litigation expenditures and their decisions to litigate. Contrary to the prevailing wisdom, we discover that, when fee shifting is limited, the English rule presents some interrelated advantages over the American rule, including the reduction of litigation rates and the possible reduction of expected litigation expenditures. Our results unveil a hidden virtue of limited fee shifting, showing that an increase in such limit may lead to a desirable sorting of socially valuable litigation.

June 10, 2015

Judicial Independence, Judges’ Incentives and Efficiency

Alessandro Melcarne, Giovanni B. Ramello

Page range: 149-169

Abstract

Although often assumed by economic theory, the idea of an efficient judicial system often sounds like an oxymoron. In this work, we suggest an innovative approach to investigating the determinants of court performance. Our focus is on determining the ideal institutional environment for fostering the appropriate set of incentives for judges to operate efficiently. In this setting, we find evidence that greater independence enjoyed by the judiciary from politics induces more competition among judges to obtain professional upgrades. Such an environment will incentivize ambitious individuals to be more efficient, thus positively affecting the aggregate performance of the judiciary.

May 20, 2015

Tipping the Scales – Settlement, Appeal and the Relevance of Judicial Ambition

Robin Christmann

Page range: 171-207

Abstract

Judges become ambitious decision makers when they face appellate review. This paper applies a contract theoretic perspective to the behavior of self-interested trial judges in a two-level court system and analyzes how different judicial stereotypes affect contracting in “the shadow of” the court. Confronted with the factual ambiguity of a case, maximizing judges pursue an (privately) optimal strategy and tip the scales of the trial outcome. The model reveals that careerist judges will deliberately allow for a certain probability of judicial error in their decisions to pursue “self-advertisement” at the appeal court. Furthermore, the strongest fact-finding judge is tempted by in-trial settlements to evade the risk of appellate review, and does not foster contract verifiability to the desirable extent. Our implications put into perspective the function of appellate courts to promote court accuracy. Additionally, a judicial tendency to conclude lawsuits through in-court settlements may strain contract output.

May 20, 2015

Third-Party Punishment under Judicial Review: An Economic Experiment on the Effects of a Two-Tier Punishment System

Peter Lewisch, Stefania Ottone, Ferruccio Ponzano

Page range: 209-230

Abstract

This paper analyses, by means of an economic experiment, the impact of a vertical review on third-party punishment. Whereas the existing empirical literature has studied, under many different aspects, third-party costly punishment as such, it has not addressed the impact of a second “instance” (competent to overrule punishment decisions by the first punisher) on the incidence and amount of such first-instance punishment and the underlying unwanted behaviour (“stealing”). In this paper, we apply experimental methodology that allows us to construct in the lab the counterfactual context for a direct institutional comparison that we cannot find in real life. In particular, we examine first of all whether and how the presence of a second “vertical” punishment layer (i.e. of a “second instance”) affects the amount of punishment imposed in the first instance. Secondly, we check whether the presence of a second level of punishment has a deterrent effect on the underlying (undesired) behaviour. Finally, we examine the level of satisfaction of the victims in all scenarios. In our experiments, we find that the introduction of a second (vertical) tier of punishment increases (i) the level of punishment provided for in the first instance, (ii) deterrence with regard to the underlying behaviour (i.e. a reduction in the number of “thefts” being committed), and also (iii) the level of satisfaction for victims. Real-world applications of this study are plentiful, including the organisation of courts and the appeals process as a whole. Our evidence confirms that the presence of an “instance” (a second tier of legal decision making) is, other things equal, likely to generate beneficial effects.

May 20, 2015

A Commitment Mechanism to Eliminate Willful Contract Litigation

Osnat Jacobi, Noam Sher

Page range: 231-266

Abstract

This paper concerns companies that sell commodities and are in their initial stages of formation and growth. Such companies will often face severe difficulties due to the banking system’s unwillingness to finance their activities before they are able to develop sufficient credit histories. When faced with a loss contract, such a company may prefer to breach and litigate simply in order to gain time before having to pay off its debt, thereby preventing immediate insolvency. We have designed a new financial tool to eliminate this incentive to willfully litigate. Under this mechanism, the seller undertakes an obligation to pay a bank the amount of the buyer’s damages if the seller does not deliver the good on delivery day in accordance with the contract and law. The bank, in turn, undertakes to pay the buyer the amount of her damages if received by the bank. The effect of this mechanism is to shift the buyer’s entitlement to the bank. This increases the seller’s cost of willful litigation: if the seller chooses to breach he will prefer paying the buyer’s damages to the bank in order to avoid any indication of default on the bank’s records, since such an indication will affect his credit rating and access to financial markets in the future. In addition, the mechanism gives the seller an incentive to breach the contract if and only if the contract becomes ex-post inefficient. We also demonstrate ex-ante benefits from the mechanism: by eliminating the risk of willful litigation, established buyers may be willing to raise the contract price, thereby increasing the probability of newcomers’ survival. The mechanism also enables the banking system to screen new companies according to their quality, and use their contracts as collateral. Ultimately, this can result in the newcomer achieving financial stability earlier.

June 10, 2015

Centralization versus Decentralization of Legislative Production and the Effect on Litigation: A Case Study

Giuseppe Di Vita

Page range: 267-291

Abstract

This paper presents an empirical investigation into the effects on the duration of disputes of the coordination externalities that arise from the decentralization of laws and regulatory power from the state to the regions. To this aim we consider Italy, whose territory is divided into twenty regions, using a dataset derived from 800 judgements pronounced by the Italian regional administrative courts over eight years, from 2000 to 2007. The most important result of our research is that in sectors where European legislation prevails, and lower coordination externalities are observed, we find a shorter duration of disputes, whilst in economic sectors more exposed to decentralized legislation, with greater coordination externalities, disputes tend to have a longer duration.

June 6, 2015

An Empirical Analysis of Case Disposition Time in Belgium

Samantha Bielen, Wim Marneffe, Lode Vereeck

Page range: 293-316

Abstract

This paper analyzes the determinants of case disposition times in Belgian first instance courts by exploiting a unique dataset of 174 court cases. Unlike previous studies, our analysis focuses mainly on case-level determinants. Regression results show that the use of expert assessments on average prolongs overall disposition time by 902 days. Furthermore, the number of pleadings, as a proxy of case complexity, also significantly impacts the duration of trials. Additionally, results indicate that case outcomes, such as settlements or plaintiff wins, are significant determinants of case duration. In addition to case-level characteristics, our results indicate that two civil procedure reforms aimed at accelerating adjudication led to a major decrease of case duration in Belgian first instance courts.

June 27, 2015

Bottlenecks or Inefficiency? An Assessment of First Instance Italian Courts’ Performance

Massimo Finocchiaro Castro, Calogero Guccio

Page range: 317-354

Abstract

The efficiency and effectiveness of judicial systems has become one of the main points of interest in public sector administration, due to the beneficial effects of an efficient judicial system on economic growth and firm competition. This is particularly relevant in Italy where judicial proceedings are extremely long-lasting due to the huge (in)efficiency of courts and to the presence of bottlenecks that affect the efficient management of court activity. This paper attempts to measure the relative technical efficiency of Italian first instance courts in the period 2010–2011 by applying a non-parametric frontier and distinguishing between managerial (in)efficiency and (in)efficiency due to the non-discretionary caseload. Our findings show that, while the presence of bottlenecks in the caseload plays a role in the level of court inefficiency, this effect is relatively small compared with the inefficiency due to the lack of managerial ability to efficiently manage both the backlog and increases in filings. Furthermore, this outcome is more relevant in the South rather than in the North of the country. Finally, our empirical findings are robust to an alternative estimator and sample variation.

June 5, 2015

Does Patent Quality Drive Damages in Patent Lawsuits? Lessons from the French Judicial System

Béatrice Dumont

Page range: 355-383

Abstract

This paper presents an empirical analysis of the link between patent damage awards and patent quality, based on information from suits filed during the period 2008–2013 in France. Our results show that civil damage awards attributed by French judges are significantly linked to patent quality, as assessed from a statistical point of view, but this link is imperfect.

About this journal

Objective
The Review of Law & Economics (RLE) is published in cooperation with the European Association of Law and Economics (EALE) and De Gruyter. The Review publishes theoretical and empirical interdisciplinary research in law and economics-related subjects. The Journal explores the various understandings that economic approaches shed on legal institutions. It specializes in the application to legal issues of insights developed in economic disciplines.

Unlike traditional journals in law and economics, The Review of Law & Economics is published online, avoiding much of the delays and hassle of print publication. The electronic content in the journal appears continuously, as articles are accepted for publication.

Topics

Law
Economics
Microeconomics
Game theory
Finance
Econometrics
Decision theory
Political economy
Public choice
Behavioral economics
Social psychology
Evolutionary biology

Article formats

Theoretical and empirical interdisciplinary research articles

Announcements:

Professor Francesco Parisi (Univ. of Minnesota and Univ. of Bologna) has been awarded the 2018 EALE Award during the latest annual conference of the European Association of Law & Economics in Milan. The prize is awarded every two years for lifetime achievements and significant contributions to the field of Law and Economics, in particular to the development of this scientific movement in Europe. The winner is also given lifetime honorary membership in the Association. Professor Parisi will deliver the EALE Award Lecture at the next EALE conference (in Tel Aviv in september 2019). The lecture will then be published in the EALE official journal, the Review of Law and Economics. The prize is awarded by the Management Board of the Association following the advise of a committee composed by former EALE Award Winners and EALE Presidents.