The Effect of Frivolous Lawsuits on the Settlement of Litigation

Abstract

It is commonly alleged that a substantial proportion of lawsuits are frivolous and are filed only for their nuisance value. This paper models settlement bargaining in the presence of frivolous suits as a game of asymmetric information, where the plaintiff knows the true meris of his claim, and the defendant does not, apart from any inferences he can draw from the fact of suit. When there is free entry to the opportunity to make a frivolous claim, the profit from doing so is driven to zero, and the surplus from settlement bargaining is completely dissipated. Several policies dealing with frivolous suits are examined; it turns out that requiring a losing litigant to pay the expenses of the winner (the English rule) does not alleviate the problem, but introducing a refundable deposit does.