A general model of legal conflict: Legal expenditure as a rent-seeking game
The model of strategic evidence gathering in Chapter 2 can be generalised to analyse litigation expenditure and explore various issues such as the endogenous determination of costs and the effect of cost-shifting rules. We illustrate some of these issues by considering the evidence-gathering framework in Chapter 2, involving a plaintiff and a defendant.
Suppose that the total cost of producing evidence is CP (eP) the plaintiff and CD (eD) for the defendant. Suppose that the likelihood ratio is:
Where f(.) and g(.) are increasing, concave functions. Suppose that the judgement has a value of $J to the plaintiff, and the defendant stands to lose $J if the plaintiff is successful. If they are both risk neutral, then the expected net benefits to the plaintiff of going to trial are:
for the defendant. In an interior Nash equilibrium, the necessary first-order conditions are:
One obvious implication of (11.20) and (11.21) is that if the parties have identical cost functions and evidence production functions, they will employ the same amount of effort in the legal battle.