ABSTRACT
We consider a model of a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff therefore creates a negative externality on the other plaintiffs. It was shown in Che and Spier (2008) that failure to internalize this externality can often be exploited by the defendant. However, if plaintiffs make sequential take-it-or-leave-it settlement offers, we can show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. When we relax the assumptions, allowing each party to have positive bargaining power, the result lies between the two cases, and the plaintiffs can be exploited jointly by a fellow plaintiff and the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement even having complete information. This may explain why we observe derivative suits in the US but not in Europe.
Rutkowski, Karol and Stremitzer, Alexander, Plaintiffs Exploiting Plaintiffs Mass Tort Claims v Shareholder Derivative Suits (March 27, 2025), Center for Law and Economics Working Paper Series.
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