A. Mitchell Polinsky and Steven Shavell (Stanford Law School and Harvard Law School) have posted Costly Litigation and Optimal Damages on SSRN. Here is the abstract:
- In this article we examine how the optimal level of damages depends on litigation costs. We assume that litigation costs have a fixed component and a variable component that rises with the level of damages. Our main result is that optimal damages are less than the sum of the victim's harm and the victim's litigation costs - even though damages equal to that sum would internalize the full social cost of an accident. The reason is that lowering damages reduces variable litigation costs. Indeed, optimal damages may be less than harm.
