Litigation as a Tournament∗

This paper analyzes civil litigation between a plaintiff and a defendant who exert costly effort in a tournament game. In the unique Nash equilibrium the litigant with the stronger case is more likely to win, but there is distortion in the sense that the equilibrium probability of success is closer to 0.5 than the prior is. A cost-shifting rule determines the proportion of the winner’s costs recoverable from the loser. An increase in the proportion of recoverable costs reduces distortion to the inherent strength of the case, but it also reduces the total welfare of the litigants because it increases litigation costs. In a modified litigation game with judicial management, a judge chooses the optimal cost-shifting rule to minimize both private costs spent on litigation and distortion to inherent strength of the case. In the unique subgame perfect equilibrium, the judge’s choice of optimal proportion of recoverable costs increases with the relative weight which she assigns to distortion and with the weight given to the inherent strength of the case. Litigation is less likely to take place as the relative weight which the judge assigns to distortion increases.