It Is About Time: A Dynamic Theory of Litigation and Legal Standards

Abstract

I propose an integrated understanding of litigation and legal standards that allows us to answer key questions in the functioning of common law legal systems: When do substantive trials occur?; do these trials take place too frequently or infrequently?; and can legal standards be used to correct a potentially inefficient frequency of litigation? I characterize the dynamics of trials in continuous time and predict their occurrence on an infinite horizon. After solving an optimal stopping problem, I show that the private and the optimal litigation frequencies are not equal because of two externalities (the cost of litigation externality and the law externality). I show that each of these externalities can be positive or negative. In addition, I identify corrections for these externalities, derive time-variant and time-invariant optimal standards, and discuss policy implications.

Keywords: Timing of substantive trials, Standard of effort, optimal frequency of litigation, dynamic litigation, common law courts, negligence, law externality, cost of litigation externality

JEL Classification: K10, K40, K41