Chapter 11: Topics in the Economics of the Legal Process
•Three immediate causes of the filing of legal complaints:
oInjuries that trigger disputes
oThe costs of filing complaints
oThe EV’s of the claims
•An increase in the money damages awarded at trial to successful plaintiffs
increase the EVT, which increases the EVC and leads to more claims being filed.
oIn the case where EVC was < 0 but now is > 0, the victim will choose to
pursue a claim.
•An increase in the expected damages for the plaintiff will also have the opposite
effect (expected damages = change in probabilities or payoffs).
oI.e. the defendant will take more precaution and reduce the number of
times harm is caused and thus less opportunity is given to victims to file
•From damages = 0, no claims are filed but as damages start to increase, more
claims begin to be filed until a point,
, where increases in damages result in
defendants taking more precaution and thus the number of claims filed falls.
•Where litigants pay low fees to file claims, the court often spends little on
deciding a case, relying primarily on written documents rather than hearing
oLow fees also result in excessive claims by
# of claims
•To the left of the filing cost line, costs > EVC and so these people do not sue.
oRaising costs pushes the line to the right and more people do not sue.
•To the right of the filing cost line, EVC > costs and so these people sue.
oDropping costs pushes the line to the left and more people sue.
•When setting the fees charged by courts, authorities need to try to minimize social
oThe decision should be made on a marginal basis.
A small increase will make another person not sue since now costs
•Administration costs are saved from the one less suit but
error costs increase as a result of that person now receiving
0 instead of the EVC of their claim.
•With an increase in the number of lawyers, there is a shift in the supply curve of
the number of lawyers available and this forces the price of lawyers to drop.
oWith more lawyers available, there are less cases for an average lawyer to
choose from and so they are forced to take cases they normally would not
have taken because the EV wasn’t high enough.
oThe lower price of lawyers means that filing claims is cheaper and there
will thus be more claims filed.
•The bar in every country tries to keep the supply of legal services low and the
price high as a result of the above.
oThey accomplish this by setting high professional qualifications for the
right to argue in court or supply other legal services.
•In certain countries fee schedules are published that set the minimum fee that
lawyers can charge.
oIf there is an increase in the number of lawyers in these countries, the
price will not drop (because it can’t); so the effect is that unemployment
increases between lawyers.
This is as a result of excess supply in the market.
oThis prohibition on price competition promotes quality competition and
•Economics suggests that class actions are appropriate when the stakes are large in
aggregate and small for any individual plaintiff.
•Class actions ideally consolidate litigation to achieve economies of scale and
provide a legal remedy for small injuries that are large in aggregate.
oSince it may be hard to distribute small sums of money to many people,
courts may allow the distribution to few people and the remaining amount
to be donated to a charity that deals with people who are similar to those
in the pool of plaintiffs.
•The market for legal services is an agency game.