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Costly Litigation and Optimal Damages

Nov 2012
Working Paper
12-005
By  A. Mitchell Polinsky, Steven Shavell
Abstract: A basic principle of law is that damages paid by a liable party should equal the harm caused by that party. However, this principle is not correct when account is taken of litigation costs, because they too are part of the social costs associated with an injury. In this article we examine the influence of litigation costs on the optimal level of damages, assuming that litigation costs rise with the level of damages.