The Incentive to Take Care and the Deterrence of a Nuisance Suit

Abstract

This paper investigates three important issues in law and economics: the incentive to take care in the presence of nuisance suits, the incentive to bring about a nuisance suit by a plaintiff, and how to resolve a legal dispute. For this, we consider a three-stage game between a plaintiff and a defendant. We identity two types of equilibria one of which prevails, depending on the parameter values. The main results show that: generally the equilibrium level of care differs from the socially optimal care level; nuisance suits are not fully deterred; in some cases, litigation cannot be avoided because of the informational asymmetry.