law and economics-charles w. upton valuing litigation
Post on 19-Dec-2015
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Valuing Litigation
The Value of a Claim
• Warts and all, let's take the table as our basic starting point.
• How much is the trial - or claim - worth?
Valuing Litigation
The Value of a Claim
• Warts and all, let's take the table as our basic starting point.
• How much is the trial - or claim - worth?
• That is, what is the minimum amount Jim will take – To avoid filing a claim?– To settle the case?
Valuing Litigation
Some Assumptions
• If Jim wins, he will get $100.
• If he goes to trial, he has a 50% chance of winning.
• If he loses at trial, he has a 10% chance of winning on appeal.
• If he tries to settle the case, he has a 70% chance of getting a $50 settlement offer.
Valuing Litigation
Transactions Cost
• It will cost him $10 to file the case.
• Discovery will cost $3
• The trial will cost $20
• An appeal will cost $20.
Valuing Litigation
The Process (6)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
Valuing Litigation
The Process (6)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
Expected value of an appeal =-$20 + (0.10) (100) = -$10.
Valuing Litigation
The Process (6)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
Expected value of an appeal =-$20 + (0.10) (100) = -$10.
$-10
Valuing Litigation
The Process (5)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$-10 $0
If he loses, the best option is not
to appeal.
If offered any
settlement after a trial loss, take it!
Valuing Litigation
The Process (5)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$-10 $0
If he loses, the best option is not
to appeal.
Note: if the cost of an appeal was $5, EV of an appeal =
-$5 + (0.10) (100) = $5.
Valuing Litigation
The Process (4)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
Expected value just before trial =-$20 + (0.5)(100) + (0.5)(EV of Appeal)
=-$20+$50+0= $30
Valuing Litigation
The Process (4)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
Expected value just before trial =-$20 + (0.5)(100) + (0.5)(EV of Appeal)
=-$20+$50+0= $30
$30
Valuing Litigation
The Process (3)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$30
Just before trial, the minimum acceptable
offer is $30
Valuing Litigation
The Process (2)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
A person thinking of beginning discovery knows that discovery will cost $3. After discovery, there is a 70% chance that there will be a settlement worth $50, and a 30% chance of going
to trial.
Valuing Litigation
The Process (2)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
A person thinking of beginning discovery knows that discovery will cost $3. After discovery, there is a 70% chance that there will be a settlement worth $50, and a 30% chance of going
to trial.
The value before beginning discovery is
-$3 + (0.7)(50) + (0.3)(EV of Trial) =
-$3+$35+$9=$41
Valuing Litigation
The Process (2)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$30
$41
Valuing Litigation
The Process (1)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
-$10 + (0.7)(50) + (0.3)(EV Before Discovery)
=-$10+$35+$12.30= $37.30
Valuing Litigation
The Process (1)Jim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$37.30$27.30
-$10 + (0.7)(50) + (0.3)(EV Before Discovery)
=-$10+$35+$12.30= $37.30
Valuing Litigation
The ProcessJim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$0
$30
$41
$37.30$27.30
Valuing Litigation
The ProcessJim, injured, decides
whether to sueSettle or begin
Discovery?
BargainsQ S
SGoes to Trial
WAppeal?
Q
AppealsW
L
$0
$30
$41
$37.30$27.30
Key Elements in process. (1) Backward Induction.
(2) If we have new information, we can adjust table accordingly
Valuing Litigation
Information for Both Parties
• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.
• Bill believes his chances of losing are 30%
• Jim believes his changes of winning are 60%.
• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.
Valuing Litigation
Information for Both Parties
• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.
• Bill believes his chances of losing are 30%
• Jim believes his changes of winning are 60%.
• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.
Bill believes he is out (0.3)(100) + $2 +$8 =$40
Jim believes he will get (0.6)(100) - $2 -$8 =$50
Valuing Litigation
Information for Both Parties
• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.
• Bill believes his chances of losing are 30%
• Jim believes his changes of winning are 60%.
• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.
Bill believes he is out (0.3)(100) + $2 +$8 =$40
Jim believes he will get (0.6)(100) - $2 -$8 =$50
No settlement!
Valuing Litigation
Information for Both Parties
• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.
• Bill believes his chances of losing are 30%
• Jim believes his changes of winning are 60%.
• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.
Bill believes he is out (0.3)(100) + $2 +$8 =$40
Jim believes he will get (0.6)(100) - $2 -$8 =$50
No settlement!
After discovery, and that, Bill raises his chances of losing to 40% Jim lowers his chances of winning to
50%. Now Bill will offer up to $48 and Jim will be willing to accept $42.
Valuing Litigation
Information for Both Parties
• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.
• Bill believes his chances of losing are 30%
• Jim believes his changes of winning are 60%.
• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.
Bill believes he is out (0.3)(100) + $2 +$8 =$40
Jim believes he will get (0.6)(100) - $2 -$8 =$50
No settlement!
After discovery, and that, Bill raises his chances of losing to 40% Jim lowers his chances of winning to
50%. Now Bill will offer up to $48 and Jim will be willing to accept $42.
Its Settlement Time!