Third-Party Financing of Litigation: Legal Approaches and a Formal Model

CESifo Economic Studies, Vol. 60, 3/2014, 525-553

Posted: 26 Aug 2015

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Felix Maultzsch

Goethe-Universität Frankfurt am Main

Date Written: June 28, 2013

Abstract

In the article, we discuss the phenomenon of third-party financing of lawsuits, which has been subject to intense debate from a legal as well as from an economic point of view. Drawing on the examples of Germany, Australia, and the United States, we show in Part I that different legal systems still take different approaches to third-party financing and its economic implications. In Part II, we introduce a stylized model that abstracts from the peculiarities of specific legal systems and in which we compare third-party financing of lawsuits with incentive fees for lawyers. We conclude that a combination of contingency fees and third-party financing may be the best way to overcome agency problems and financial constraints of would-be plaintiffs who would like to pursue meritorious claims.

Keywords: litigation, hidden information, hidden action

JEL Classification: K41

Suggested Citation

Demougin, Dominique and Maultzsch, Felix, Third-Party Financing of Litigation: Legal Approaches and a Formal Model (June 28, 2013). CESifo Economic Studies, Vol. 60, 3/2014, 525-553, Available at SSRN: https://ssrn.com/abstract=2650429

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

Felix Maultzsch (Contact Author)

Goethe-Universität Frankfurt am Main ( email )

Fachbereich Rechtswissenschaft
Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60629
Germany
+49-69-798-34216 (Phone)
+49-69-798-35016 (Fax)

HOME PAGE: http://www.jura.uni-frankfurt.de/42775958/Maultzsch

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