The impact of the value of dispute, discount rates and litigation costs on the decision to litigate

Abstract

The different interests of the plaintiff and the defendant represent the fundamental mechanism that drives the litigation. If the litigation is initiated, the aim of the plaintiff is to maximize the net benefit of litigation, and the goal of the defendant is to minimize the expected litigation costs. When the plaintiff and the defendant make a decision to initiate litigation or to make the settlement, both sides in the dispute behave rationally, trying to achieve conflict­ing goals. Important factors that influence the decision to initiate litigation, among others, are the value of the dispute, the discount rate and the litigation costs. Based on the economic model of bringing a lawsuit (model of optimism) it has been found that the rise of the value of dispute increases the likelihood of initiating litigation, while increasing the discount rate and the amount of litigation costs, increases the likeli­hood of the settlement. Different rules for calculating the costs of litigation (English vs. American rule) give different litigants incentives to change their behavior. Namely, the legal system of the Republic of Serbia uses the English rule to calculate litigation costs, and the litigation is initiated at the lower value of the dispute compared to the American rule. The American rule motivates litigants to settle at a lower value of the discount rate compared to the English rule. Based on the model, it was found that an increase in litigation costs in our legal system must be of greater intensity in relation to the American rule, in order to motivate the litigants to make a settlement.

Keywords

• economic analysis of litigation
• settlement
• the value of dispute
• discount rate
• litigation costs