Should Plaintiffs Win What Defendants Lose? Litigation Stakes, Litigation Effort, and the Benefits of Decoupling

In a 1991 paper, Polinsky and Che argue that lowering plaintiffs’ recovery and raising defendants’ damages can deliver the same level of deterrence with fewer filed suits. A subsequent paper by Kahan and Tuckman provisionally corroborates Polinsky and Che’s analysis in an extended model that accounts for the effect of litigation states on litigation effort levels. In contrast, we show that when litigation effort is endogenous, Polinsky and Che’s proposal to lower recovery and raise damages may no longer improve social welfare. We then characterize the kinds of suits where it is in fact suboptimal to set recovery below damages. Of significance for the current policy debate, we find that such suits share many of the empirical premises about litigation that ground conventional arguments in favor of making recovery less than damages. Our findings are robust to the possibility of out-of-court settlement, plaintiffs’ employment of contingent-fee lawyers, and alternative fee-shifting rules.