INCENTIVES AND THE ALLOCATION OF LEGAL COSTS: Products Liability

Incentives and the Allocation of Legal Costs Products Liability Marilyn J. Simon This paper examines the legal expenditures, the probability of court error and product quality under several rules for allocation legal costs. Equilibrium legal expenditures for the plaintiff and defendant are derived under each rule and the effect of a change on the equilibrium expenditures is derived. It is found that when the proportion of legal costs paid by a losing party increases, the expenditures of the party which should win increase and under certain assumptions, the accuracy of the decision also increases. The suit and settlement decisions are also examined, and risk aversion is discussed. Finally, conditions under which the equilibrium product quality increases as the proportion of costs paid by the losing party increase are derived.