Kathryn E. Spier

Domenico De Sole Professor of Law

Hauser 302

617-496-0019

Assistant: Susan Norton / 617-496-2609

Biography

Kathryn E. Spier is the Domenico De Sole Professor of Law at the Harvard Law School and President Emeritus of the American Law and Economics Association.  She received her PhD from MIT in 1989, and her BA in mathematics and economics from Yale in 1985. Before joining the Harvard Law School in 2007, she was for 13 years a professor in the Management and Strategy department at the Kellogg Graduate School of Management at Northwestern University and served as the Richard M. Paget Distinguished Professor. Before that, she served as assistant and associate professor in the Harvard Economics Department. Professor Spier is currently serving as a co-editor of the RAND Journal of Economics and is a Research Associate in the Law and Economics Group of the National Bureau of Economic Research. She has published extensively in the areas of law and economics and industrial organization. Her areas of interest include the economics of litigation, contracts, tort law, antitrust, and business organization.  Professor Spier’s current research on contracts and bargaining is supported by a grant from the National Science Foundation.

Areas of Interest

Claudia M. Landeo & Katheryn E. Spier, Naked Exclusion: An Experimental Study of Contracts with Externalities, 99 Am. Econ. Rev. 1850 (2009).
Categories:
Corporate Law & Securities
,
Banking & Finance
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Business Organizations
,
Law & Economics
Type: Article
Abstract
This paper reports the results of all experiment on exclusive contracts. We replicate the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000). Our findings are as follows. First, when the buyers can communicate, discrimination raises the likelihood of exclusion. Second, when the incumbent seller is unable to discriminate and must make the same offers to the buyers, communication reduces the likelihood of exclusion. Communication also induces more generous offers when the seller cannot discriminate, and divide-and-conquer offers when the seller call discriminate. Third, when communication is allowed, payoff endogeneity increases the likelihood of exclusion. (JEL C72, C91, D62, D86, K12, K21, L12, L42)
Kathryn Spier, Litigation, in The Handbook of Law and Economics 249 (A. Mitchell Polinsky & Steven M. Shavell eds., 2007).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Book
Abstract
The purpose of this chapter is to survey the academic literature on the economics of litigation and to synthesize its main themes. The chapter begins by introducing the basic economic framework for studying litigation and out-of-court settlement. One set of issues addressed is positive (or descriptive) in nature. Under what conditions will someone decide to file suit? What determines how much is spent on a lawsuit? When do cases settle out of court? Important normative issues are also addressed. Are the litigation decisions made by private parties in the interest of society as a whole? Next, the chapter surveys some of the more active areas in the litigation literature. Topics include rules of evidence, loser-pays rules, appeals, contingent fees for attorneys, alternative dispute resolution, class actions, and plea bargaining.
Bruce L. Hay & Kathryn E. Spier, Manufacturer Liability for Harm Caused by Consumers to Others, 95 Am. Econ. Rev. 1700 (2005).
Categories:
Consumer Finance
,
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Consumer Protection Law
,
Torts - Product Liability
,
Remedies
,
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.
Albert H. Choi & Kathryn E. Spier, Taking a Financial Position in Your Opponent in Litigation (Va. Law & Econ. Research Paper No. 3, Nov. 7, 2016).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Article
Abstract
We explore a model of litigation where the plaintiff can acquire a financial position in the defendant firm. The plaintiff gains a strategic advantage by taking a short financial position in the defendant’s stock. First, the plaintiff can turn what would otherwise be a negative expected value claim (even a frivolous one) into a positive expected value claim. Second, the short financial position raises the minimum amount the plaintiff is willing to accept in settlement, thereby increasing the settlement amount. Conversely, taking a long position in the defendant’s stock puts the plaintiff at a strategic disadvantage. When the capital market is initially unaware of the lawsuit, the plaintiff can profit both directly and indirectly from its financial position. When the defendant is privately informed of the merit of the case, the plaintiff balances the strategic benefits of short position against the costs of bargaining failure and trial. When credibility is an issue, short selling by the plaintiff can actually benefit both the plaintiff and the defendant by lowering the settlement amount and also reducing the probability of proceeding to costly trial.
Claudia M. Landeo & Katheryn E. Spier, Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence, 172 J. Inst. & Theoretical Econ. 235 (2016).
Categories:
Banking & Finance
Sub-Categories:
Contracts
Type: Article
Abstract
This paper experimentally studies stipulated damages as a rent-extraction mechanism. We demonstrate that contract renegotiation induces the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. We show that complete information about the entrant's cost lowers exclusion of high-cost entrants. Unanticipated findings are observed. The majority of sellers make more generous offers than expected. Rent extraction also occurs in renegotiation environments. Our findings from the dictatorial-seller and buyer–entrant communication treatments suggest the presence of social preferences.
Kathryn E. Spier & J.J. Prescott, Contracting on Litigation (Univ. Mich. Law & Econ. Research Paper No. 16-009, Apr. 8, 2016).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Article
Abstract
Two risk-averse parties with different subjective beliefs negotiate in the shadow of a pending trial. Through contingent contracts, the parties can mitigate risk and/or speculate on the outcome. These contracts mimic the services provided by third-party investors, including litigation funders and insurance companies. The two parties (weakly) prefer to contract with the external capital market when third-party investors are risk neutral, litigation costs are exogenous, and the market is transaction-cost free. However, contracting with third parties increases the volume of litigation, the level of litigation spending, and the aggregate cost of risk bearing. In this sense, third-party involvement in litigation reduces social welfare.
J.J. Prescott & Kathryn E. Spier, A Comprehensive Theory of Civil Settlement, 91 N.Y.U. L.Rev. 59 (2016).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Article
Abstract
A settlement is an agreement between parties to a dispute. In everyday parlance and in academic scholarship, settlement is juxtaposed with trial or some other method of dispute resolution in which a third-party factfinder ultimately picks a winner and announces a score. The "trial versus settlement" trope, however, represents a false choice; viewing settlement solely as a dispute-ending alternative to a costly trial leads to a narrow understanding of how dispute resolution should and often does work. In this Article, we describe and defend a much richer concept of settlement, amounting in effect to a continuum of possible agreements between litigants along many dimensions. "Fully" settling a case, of course, appears to completely resolve a dispute, and if parties to a dispute rely entirely on background default rules, a "naked" trial occurs. But in reality virtually every dispute is "partially" settled. The same forces that often lead parties to fully settle joint value maximization, cost minimization, and risk reduction will under certain conditions lead them to enter into many other forms of Pareto-improving agreements while continuing to actively litigate against one another. We identify three primary categories of these partial settlements: award-modification agreements, issue-modification agreements, and procedure-modification agreements. We provide real-world examples of each and rigorously link them to the underlying incentives facing litigants. Along the way, we use our analysis to characterize unknown or rarely observed partial settlement agreements that nevertheless seem theoretically attractive, and we allude to potential reasons for their scarcity within the context of our framework. Finally, we study partial settlements and how they interact with each other in real-world adjudication using new and unique data from New York's Summary Jury Trial Program. Patterns in the data are consistent with parties using partial settlement terms both as substitutes and as complements for other terms, depending on the context, and suggest that entering into a partial settlement can reduce the attractiveness of full settlement. We conclude by briefly discussing the distinctive welfare implications of partial settlements.
James D. Dana, Jr. & Kathryn E. Spier, Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality?, 43 Int’l J. Indus. Org. 142 (2015).
Categories:
Consumer Finance
,
Corporate Law & Securities
Sub-Categories:
Consumer Protection Law
,
Antitrust & Competition Law
Type: Article
Abstract
Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.
Claudia M. Landeo & Kathryn E. Spier, Incentive Contracts For Teams: Experimental Evidence, 119 J. Econ. Behav. & Org. 496 (2015).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Law & Behavioral Sciences
Type: Article
Abstract
This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff. Greater team cooperation is successfully induced with less generous sharing rules in infinitely repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff, suggesting that agents’ communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can backfire. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity.
James D. Dana & Kathryn E. Spier, Bundling and Quality Assurance (Northeastern Univ. D’Amore-McKim Sch. of Bus. Research Paper, Aug. 27, 2015).
Categories:
Consumer Finance
,
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Consumer Protection Law
,
Antitrust & Competition Law
,
Law & Economics
Type: Article
Abstract
We consider a repeated moral hazard model of product quality choice by a multiproduct firm selling experience goods with imperfect private monitoring. When consumers receive imperfect private signals of product quality, consuming two products from the same firm improves monitoring. Monitoring by consumers has a positive externality on other consumers, but consumers ignore this when making their purchase decisions. Product bundling improves product quality by constraining consumers to purchase both goods and monitor more effectively. The social and private value of bundling is even larger if (1) consumers can only attribute a negative signal to a pair of complementary products and not to a specific product, and (2) if one of the two goods is a durable and the other is a complementary nondurable.
John C. Coates, IV, Jesse M. Fried, & Kathryn E. Spier, What Courses Should Law Students Take? Lessons from Harvard’s Big Law Survey, 64 J. Legal Educ. 443 (2015).
Categories:
Corporate Law & Securities
,
Legal Profession
,
Banking & Finance
Sub-Categories:
Finance
,
Legal Education
,
Legal Services
Type: Article
Abstract
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
J.J. Prescott, Kathryn E. Spier & Albert Yoon, 审判与和解:高低协议研究 [Trial and Settlement: A Study of High-Low Agreements], 80 比较: Comp. Stud. 154 (2015) (Yajie Xin, trans.).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Empirical Legal Studies
Type: Article
David Rosenberg & Kathryn E. Spier, Incentives to Invest in Litigation and the Superiority of the Class Action, 6 J. Legal Analysis 305 (2014).
Categories:
Civil Practice & Procedure
Sub-Categories:
Class Action Litigation
,
Litigation & Settlement
Type: Article
Abstract
We formally demonstrate the general case for class action in a rent-seeking contest model, explaining why separate action adjudication is biased in the defendant's favor and collective adjudication is bias free. Separate action bias arises from the defendant's investment advantage in capitalizing on centralized control over the aggregate (classwide) stake in the common question defense, while the plaintiff, with only an individual recovery at stake, spends much less. Class action eliminates bias by enabling both parties to make their best case through centralized optimal classwide investments. Our social benefit-cost analysis shows that class action surpasses alternative methods for achieving bias-free adjudication.
Claudia M. Landeo & Kathryn E. Spier, Irreconcilable Differences: Judicial Resolution of Business Deadlock, 81 U. Chi. L. Rev. 203 (2014).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
Type: Article
Albert H. Choi & Kathryn E. Spier, Should Consumers be Permitted to Waive Products Liability? Product Safety, Private Contracts, and Adverse Selection, 30 J. Law Econ. & Org. 734 (2014).
Categories:
Civil Practice & Procedure
,
Consumer Finance
Sub-Categories:
Consumer Contracts
,
Torts - Product Liability
Type: Article
Abstract
A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the risk type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated damages to be paid by the firm ex post in the event of an accident. Although the stipulated damage payments are a potential solution to the moral hazard problem, firms have a private incentive to reduce the stipulated damages (and simultaneously lower the up front price) in order to attract the safer consumers who are less costly to serve. The competitive equilibrium-if an equilibrium exists at all-features suboptimally low stipulated damages and correspondingly suboptimal levels of product safety. Imposing some degree of tort liability on firms for uncovered accident losses-and prohibiting private parties from waiving that liability-can improve social welfare.
J.J. Prescott, Kathryn E. Spier & Albert Yoon, Trial and Settlement: A Study of High-Low Agreements, 57 J. L. & Econ. 699 (2014).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Article
Abstract
This article presents the first systematic theoretical and empirical study of high-low agreements in civil litigation. A high-low agreement is a private contract that, if signed by litigants before trial, constrains any plaintiff's recovery to a specified range. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants' mutual interest because they limit the risk of outlier awards while still allowing mutually beneficial speculation. Using claims data from a national insurance company, we describe the features of these agreements and empirically investigate the factors that may influence whether litigants discuss or enter into them. Our empirical findings are consistent with the predictions of the theoretical model. Other applications include the use of collars in mergers and acquisitions.
Kathryn E. Spier, Product Safety, Buybacks and the Post-Sale Duty to Warn, in Economic Models of Law (Thomas J. Miceli & Mathew J. Baker eds., 2014).
Categories:
Civil Practice & Procedure
Sub-Categories:
Torts - Product Liability
,
Torts - Negligence
Type: Book
Abstract
A manufacturer learns a product's risks after it has been sold and distributed to consumers. When held strictly liable for product-related injuries, the manufacturer offers to repurchase the product when the risk exceeds a threshold. Consumers accept the offer when their private valuations of consumption are smaller than the buyback price. The manufacturer's private incentives to stage a buyback are insufficient, the buyback price offered is too low, and the continued product usage by consumers is excessive. The ability of the manufacturer to repurchase the product ex post reduces the incentive to design safer products ex ante. A negligence rule, the "post-sale duty to warn," implements the social welfare benchmark.
Kathryn E. Spier & Claudia Landeo, Shotguns and Deadlocks, 31 Yale J. on Reg. (2014).
Categories:
Corporate Law & Securities
,
Civil Practice & Procedure
Sub-Categories:
Business Organizations
,
Litigation & Settlement
,
Remedies
Type: Article
Abstract
This Article studies business deadlocks and their resolution. We advance a proposal to reform the way that courts resolve business deadlocks and value business assets. Specifically, we argue that Shotgun mechanisms, where the court mandates one owner to name a single buy-sell price and compels the other owner to either buy or sell shares at the named price, should play a larger role in the judicial management of business divorce. Since the party proposing the offer may end up either buying or selling shares, the party has an incentive to identify and name a fair price. In addition, Shotgun mechanisms will avoid inefficient delays and administrative costs associated with external appraisers and auctions. Our proposal works within the framework of current statutory rules and case law. General partnerships and limited liability companies (LLCs), the most commonly chosen legal entities, are the focus of this study.
Claudia M. Landeo & Kathryn E. Spier, Shotgun Mechanisms for Common-Value Partnerships: The Unassigned-Offeror Problem, 121 Econ. Letters 390 (2013).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
Type: Article
Abstract
Shotgun clauses are commonly included in the business agreements of partnerships and limited liability companies (LLCs), but the role of offeror typically remains unassigned. In a common-value, one-sided asymmetric information setting, unequal and inefficient outcomes occur with an unassigned offeror. Experimental results are aligned with our theory.
Claudia M. Landeo & Kathryn E. Spier, Exclusive Dealing and Market Foreclosure: Further Experimental Results, 168 J. Inst. & Theoretical Econ. 150 (2012).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Contracts
,
Corporate Law
Type: Article
Abstract
This paper reports further experimental results on exclusive dealing contracts. We extend Landeo and Spier's (2009) work by studying Naked Exclusion in a strategic environment that involves a four-player, two-stage game. In addition to the roles of seller and buyers, our experimental environment includes the role of a potential entrant (a fourth passive player). Our findings are as follows. First, payoff endogeneity increases the likelihood of exclusion. Second, communication between the potential entrant and the buyers increases buyers' coordination on their preferred equilibrium (equilibrium with entry) and hence, reduces the likelihood of exclusion. Entrant buyers communication also induces more generous offers.
Kathryn E. Spier, Product Safety, Buybacks, and the Post-Sale Duty to Warn, 27 J.L. Econ. & Org. 515 (2011).
Categories:
Civil Practice & Procedure
Sub-Categories:
Torts - Product Liability
,
Torts - Negligence
Type: Article
Abstract
A manufacturer learns a product's risks after it has been sold and distributed to consumers. When held strictly liable for product-related injuries, the manufacturer offers to repurchase the product when the risk exceeds a threshold. Consumers accept the offer when their private valuations of consumption are smaller than the buyback price. The manufacturer's private incentives to stage a buyback are insufficient, the buyback price offered is too low, and the continued product usage by consumers is excessive. The ability of the manufacturer to repurchase the product ex post reduces the incentive to design safer products ex ante. A negligence rule, the "post-sale duty to warn," implements the social welfare benchmark.
Richard R.W. Brooks, Claudia M. Landeo & Kathryn E. Spier, Trigger Happy or Gun Shy? Dissolving common-value partnerships with Texas shootouts, 41 RAND J. Econ. 649 (2010).
Categories:
Corporate Law & Securities
Sub-Categories:
Business Organizations
Type: Article
Abstract
The operating agreements of many business ventures include clauses to facilitate the exit of joint owners. In so-called Texas Shootouts, one owner names a single buy-sell price and the other owner is compelled to either buy or sell shares at that named price. Despite their prevalence in real-world contracts, Texas Shootouts are rarely triggered. In our theoretical framework, sole ownership is more efficient than joint ownership. Negotiations are frustrated, however, by the presence of asymmetric information. In equilibrium, owners eschew buy-sell offers in favor of simple offers to buy or to sell shares and bargaining failures arise. Experimental data support these findings.
Eric A. Posner, Kathryn E. Spier & Adrian Vermeule, Divide and Conquer, 2 J. Legal Analysis 417 (2010).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Law & Political Theory
Type: Article
Abstract
The maxim “divide and conquer” (divide et impera) is frequently invoked in legal theory and the social sciences. We suggest that the maxim is a placeholder for a complex of ideas related by a family resemblance, but differing in their details, mechanisms and implications. We provide an analytic taxonomy of divide and conquer mechanisms in the settings of a Stag Hunt Game and an indefinitely-repeated Prisoners’ Dilemma. These two games both illustrate a tension between the social desirability of cooperation and the private incentives for safety and short-run gains. Next, we describe the role of third parties who are not themselves players of these games but who will be harmed if the players cooperate. In particular, we explore a variety of divide-and-conquer strategies – including the sabotage of communication channels, the payment of bribes, and the imposition of penalties – that effectively prevent cooperation among the players of these games. A number of applications are considered, including labor law, constitutional design and the separation of powers, imperialism and race relations, international law, litigation and settlement, and antitrust law. Conditions under which divide and conquer strategies reduce or enhance social welfare, and techniques that policy makers can use to combat divide and conquer tactics, are also discussed.
Yeon-Koo Che & Kathryn E. Spier, Strategic Judgment Proofing 39 Rand J. Econ. 926 (2008).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Corporate Bankruptcy & Reorganization
Type: Article
Abstract
A liquidity-constrained entrepreneur raises capital to finance a business activity that may harm bystanders. The entrepreneur raises senior (secured) debt to shield assets from the tort victims in bankruptcy. For a fixed level of borrowing, senior debt creates better incentives for precaution taking than either junior debt or outside equity. The entrepreneur's level of borrowing is, however, socially excessive. Giving tort victims priority over senior debtholders in bankruptcy prevents overleveraging but leads to suboptimal incentives. Lender liability exacerbates the incentive problem even further. A limited seniority rule dominates these alternatives. Shareholder liability, mandatory liability insurance, and punitive damages are also discussed.
Kathryn E. Spier, Economics of Litigation, in The New Palgrave Dictionary of Economics (Steven N. Durlauf & Lawrence E. Blume eds., 2d ed. 2008).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Book
Abstract
This article begins by introducing the basic economic framework for studying litigation and out-of-court settlement. One set of issues addressed is positive (or descriptive) in nature. Under what conditions will someone decide to file suit? When do cases settle out of court? Normative issues are also addressed. Are these private litigation decisions in the interest of society more broadly? Next, the article surveys some of the more active areas in the litigation literature including rules of evidence, loser-pays rules, appeals, contingent fees for attorneys, alternative dispute resolution, class actions, and plea bargaining.
Yeon-Koo Che & Kathryn E. Spier, Exploiting Plaintiffs Through Settlement: Divide and Conquer, 164 J. Inst. & Theoretical Econ. 4 (2008).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Class Action Litigation
,
Law & Economics
Type: Presentation
Abstract
This paper considers settlement negotiations between a single defendant and N plaintiffs when there are Fixed costs of litigation. When making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant adopts a divide and conquer strategy. Plaintiffs settle their claims for less than they are jointly worth. The problem is worse when N is larger, the offers are sequential, and the plaintiffs make offers instead. Although divide and conquer strategies dilute the defendant's incentives, they increase the settlement rate and reduce litigation spending. Plaintiffs can raise their joint payoff through transfer payments, voting rules, and covenants not to accept discriminatory offers.
James D. Dana & Kathryn E. Spier, Entry Deterrence in a Duopoly Market, 7 B. E. J. of Econ. Analysis & Pol'y. 1 (2007).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Economics
,
Business Organizations
Type: Article
Abstract
In a homogeneous good, Cournot duopoly model, entry may occur even when the potential entrant has no cost advantage and no independent access to distribution. By sinking its costs of production before negotiating with the incumbents, the entrant creates an externality that induces the incumbents to bid more aggressively for the distribution rights to its output. Each incumbent is willing to pay up to the incremental profit earned from the additional output plus the incremental loss avoided by keeping the output away from its rival. This implies that the incumbents are willing to pay up to the market price for each unit of available output. A sequential game in which the incumbents produce first is analyzed, and the conditions under which entry is deterred by incumbents' preemptive capacity expansions are derived.
Bruce L. Hay & Kathryn E. Spier, Burdens of Proof in Civil Litigation: An Economic Perspective, in The Economics of Evidence, Procedure, and Litigation v. 2 (Chris W. Sanchirico ed., 2007).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Evidence
,
Law & Economics
Type: Book
Bruce L. Hay & Kathryn E. Spier, Burdens of Proof in Civil Litigation: An Economic Analysis, in The Economics of Evidence, Procedure, and Litigation ch. 16 (Chris W. Sanchirico ed., Edward Elgar Publ'g 2007).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Practice & Procedure
,
Law & Economics
Type: Book
Kathryn E. Spier, Settlement Bargaining and the Design of Damage Awards, in The Economics of Evidence, Procedure, and Litigation v. 2 (Chris W. Sanchirico ed., 2007).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Book
Abstract
An injurer undertakes precautions to reduce both the probability and the severity of an accident. The damages that the victim suffers are privately observed, and will be verified at a cost if the case is litigated. While finely tuned damage awards induce the injurer to take appropriate precautions ex ante, they increase the probability that the litigants will disagree about the case, and thereby aggravate the settlement process. Flat damage awards reduce the level of costly litigation, but lead to underinvestment in precautions. We show that when the litigation costs are small the optimal award is finely tuned to the actual damages, and when litigation costs are large the optimal award is a flat penalty. Applications to scheduled damages and workers' compensation are discussed.
Kathryn E. Spier, The Dynamics of Pretrial Negotiation, in The Economics of Evidence, Procedure, and Litigation v. 1 (Chris W. Sanchirico ed., 2007).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Book
Xinyu Hua & Kathryn E. Spier, Information and Externalities in Sequential Litigation, 161 J. Inst. & Theoretical Econ. 215 (2005).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
The information created and disseminated through the litigation process can have social value. Suppose a long-lived plaintiff is suing a defendant for damages sustained in an accident. The plaintiff may suffer similar damages in future accidents involving different defendants. Potential injurers update their beliefs after observing the first case and subsequently fine-tune their precautions to avoid accidents. The joint incentive of the plaintiff and the first defendant to create public information through litigation is too small. The optimal liability rule trades off providing future injurers with incentives to take precautions and providing the plaintiff with incentives to create information.
David Dranove & Kathryn E. Spier, A Theory of Utilization Review, 2 Contributions to Econ. Analysis & Pol'y (2003).
Categories:
Disciplinary Perspectives & Law
,
Health Care
Sub-Categories:
Law & Economics
,
Health Law & Policy
Type: Article
Abstract
Through utilization review (UR), managed care organizations (MCOs) monitor and alter physician treatment decisions. We show that the value of UR depends on physician incentives. Not surprisingly, when physicians have incentives to significantly overtreat patients, UR can improve social welfare by eliminating unnecessary utilization. More surprisingly, UR can also improve welfare when physicians have incentives to significantly undertreat patients. In this case, UR filters out the least valuable cases, encouraging physicians to recommend more treatments. We also show that the effectiveness of UR depends on MCO precommitment to a treatment approval threshold. Ex ante optimal precommitment can make it appear that the MCO is inappropriately withholding care ex post.
Kathryn E. Spier, The Use of 'Most-Favored-Nation' Clauses in Settlement of Litigation, 34 RAND J. Econ. 78 (2003).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Negotiation & Alternative Dispute Resolution
,
Law & Economics
Type: Article
Abstract
Many settlement agreements in lawsuits involving either multiple plaintiffs or multiple defendants include so-called "most-favored-nation" clauses. If a defendant facing multiple claims, for example, settles with some plaintiffs early and settles with additional plaintiffs later for a greater amount, then the early settlers will receive the more favorable terms as well. These MFN provisions have been prominent in the recent MP3.com case, as well as tobacco litigation, class actions, and many antitrust lawsuits. This paper considers a defendant who is facing a large group of heterogeneous plaintiffs. Each plaintiff has private information about the (expected) award that he or she will receive should the case go to trial. MFN clauses are valuable because they commit the defendant not to raise his offer over time. This has two important effects. First, holding overall settlement rate fixed, MFNs encourage earlier settlement. Second, depending upon the distribution of plaintiff types, MFNs can either increase or decrease the overall settlement rate. Social welfare implications are discussed, and alternative theories, including the strategic use of MFNs to extract value from future plaintiffs, are explored.
Kathryn E. Spier, 'Tied to the Mast': Most-Favored-Nation Clauses in Settlement Contracts, 32 J. Legal Stud. 91 (2003).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Article
Kathryn E. Spier, Settlement with Multiple Plaintiffs: The Role of Insolvency, 18 J.L. Econ. & Org. 293 (2002).
Categories:
Civil Practice & Procedure
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Bankruptcy & Reorganization
,
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
This article considers settlement negotiations between one defendant and two plaintiffs when the defendant's assets are limited. Bargaining externalities exist: the acceptance of a settlement offer by one plaintiff may either increase or decrease the other plaintiff's expected payoff at trial. Negotiations fail when the two plaintiffs bargain independently of one another and their payoffs at trial are sufficiently correlated. Collective bargaining, where the plaintiffs accept offers that are in their mutual interest, leads to higher private and social welfare. For intermediate degrees of correlation, collective bargaining shifts bargaining surplus from the plaintiffs to the defendant. For low degrees of correlation, collective bargaining shifts surplus from the defendant to the plaintiffs. (Risk dominance is used to refine the set of equilibria in this last case.) The desirability of plaintiff opt‐outs, limited‐fund class actions under Rule 23(b)(1)(B), and Chapter 11 bankruptcy law are discussed.
Steven Shavell & Kathryn E. Spier, Threats Without Binding Commitment, 2 Topics in Econ. Analysis & Pol'y (2002).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
Type: Article
Abstract
This paper explores the power of threats in the absence of binding commitment. The threatener cannot commit to carry out the threat if the victim refuses payment, and cannot commit not to carry out the threat if payment is made. An important assumption of the model is that once the threat is carried out it cannot be repeated. If exercising the threat is costly to the threatener, then the threat cannot succeed in extracting money from the victim. If exercising the threat would benefit the threatener, however, then the threat's success depends upon whether the threat may be repeated after a payment is made. In the equilibrium of a finite-period game, the threat is carried out and the victim makes no payments. In an infinite-horizon game, however, it is an equilibrium for the victim to make a stream of payments over time. The expectation of future payments keeps the threatener from exercising the threat.
James D. Dana, Jr. & Kathryn Spier, Revenue Sharing and Vertical Control in the Video Rental Industry, 49 J. Indus. Econ. 223 (2001).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Economics
,
Business Organizations
,
Law & Economics
Type: Article
Abstract
Revenue sharing contracts, in which retailers pay a royalty on sales to their suppliers, are now widely used in the video rental industry. We show that revenue sharing is valuable in vertically separated industries in which demand is either stochastic (unpredictable) or variable (e.g., systematically declining), downstream inventory is chosen before demand is realized and downstream firms engage in intrabrand competition. Unlike two-part tariffs, revenue sharing achieves the first best outcome by softening retail price competition without distorting retailers’ inventory decisions. Our theories are also consistent with trends in prices and availability following retailers’ adoption of revenue sharing contracts.
David Dranove, Kathryn E. Spier & Laurence Baker, 'Competition' Among Employers Offering Health Insurance, 19 J. Health Econ. 121 (2000).
Categories:
Health Care
,
Labor & Employment
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Health Law & Policy
,
Employee Benefits
Type: Article
Kathryn E. Spier & Alan O. Sykes, Capital Structure, Priority Rules, and the Settlement of Civil Claims, 18 Int'l Rev. L. & Econ. 187 (1998).
Categories:
Corporate Law & Securities
,
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Law
,
Corporate Bankruptcy & Reorganization
,
Shareholders
,
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
Capital structure affects the bargaining position of a firm in the settlement of civil litigation when the civil judgment may cause the firm to become insolvent. We analyze this pretrial bargaining game under different bankruptcy priority rules. A leveraged capital structure can benefit the firm’s shareholders for two reasons. Most obviously, if the civil plaintiff will not receive top priority in bankruptcy, debt may serve to directly dilute the value of the civil claim. A more subtle effect, however, arises because the cost of a large civil judgment may be borne by the debtholders in bankruptcy. This can make the shareholders into tougher bargainers by narrowing the settlement range. This latter effect implies that even unsecured debt may be used strategically to dilute the value of civil claims, even when the civil plaintiff is given priority in bankruptcy. Welfare and legal implications are discussed.
Kathryn E. Spier & Bruce L. Hay, Settlement of Litigation, in The New Palgrave Dictionary of Economics and the Law 442 (Peter Newman ed., 1998).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
Type: Book
Kathryn E. Spier, A Note on the Divergence Between the Private and the Social Motive to Settle Under a Negligence Rule, 26 J. Legal Stud. 613 (1997).
Categories:
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
,
Torts - Negligence
Type: Article
Abstract
The private motives to settle civil lawsuits are seldom aligned with the interests of society. This article presents a simple model of a negligence rule where there is too much settlement. During pretrial bargaining, the injurer has private information about his care level. In equilibrium the injurer randomizes between taking due care and being negligent, and the uninformed victim randomizes between making a high settlement offer (playing tough) and making a low settlement offer (playing soft). It is shown that social welfare would be improved if the victim were committed to take a tougher stance in negotiations and, consequently, more cases went to trial. Three legal policies to help align the private and social motives to settle are discussed: litigation subsidies, punitive damages, and the English Rule for allocating legal costs.
Bruce L. Hay & Kathryn E. Spier, Burdens of Proof in Civil Litigation: An Economic Perspective, 26 J. Legal Stud. 413 (1997).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Practice & Procedure
,
Law & Economics
Type: Article
Kathryn E. Spier & Michael D. Whinston, On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation, 26 RAND J. Econ. 180 (1995).
Categories:
Banking & Finance
,
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Economics
,
Remedies
,
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
Two roles for stipulated damage provisions have been debated in the literature: protecting relationship-specific investments and inefficiently excluding competitors. Aghion and Bolton (1987) formally demonstrate the latter effect in a model without investment or renegotiation. Although introducing renegotiation alone destroys their result, introducing both renegotiation and investment restores it. In particular, if the entrant has market power and the seller's cost of production is observable but not verifiable, then privately stipulated damages are set at a socially excessive level to facilitate the extraction of the entrant's surplus. In contrast, if the entrant prices competitively (as typically is assumed in the law and economics literature on breach), then private stipulation is efficient. Whereas a simple legal restriction on the contract corrects for any inefficiency, standard court-imposed remedies do not.
Kathryn E. Spier & David E. Weinstein, Retaliatory Mechanisms for Eliminating Trade Barriers: Aggressive Unilateralism vs. GATT Cooperation, in Imperfect Competition in International Trade 231 (Winston W. Chang & Seiichi Katayama eds., 1995).
Categories:
International, Foreign & Comparative Law
,
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
International Trade
Type: Book
Abstract
The lack of effective mechanisms for the enforcement of international treaty obligations has become a major obstacle to the success of the General Agreement on Tariffs and Trade (GATT). While multilateral trade negotiations have reduced tariff levels to historic lows, nontariff barriers (NTBs) have emerged as one of the major impediments to trade flows. Since NTBs often vary in form across countries and products, adjudicating an alleged violation of a GATT obligation is often a long and difficult process. The GATT’s virtual inability to enforce sanctions against those countries that violate GATT obligations has resulted in laws, such as section 301 of the Omnibus Trade Act of 1988, that permit unilateral retaliation as a means of resolving these disputes.
Kathryn E. Spier, Pretrial Bargaining and the Design of Fee-Shifting Rules, 25 RAND J. Econ. 197 (1994).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
Legal rules for allocating the private costs of civil litigation, or ''fee-shifting'' rules, provide powerful incentives for settlement. Within the context of a direct-revelation mechanism, the fee-shifting rule that generates the highest probability of settlement bases the allocation of costs upon the proximity of the court's award to the pretrial announcements. This mechanism resembles Rule 68 of the Federal Rules of Civil Procedure and other offer-based rules. In a simple extensive-form game, if the litigants have asymmetric information about the level of damages (probability of prevailing), then Rule 68 increases (decreases) the settlement rate.
Kathryn E. Spier, Settlement Bargaining and the Design of Damage Awards, 10 J.L. Econ. & Org. 84 (1994).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
An injurer undertakes precautions to reduce both the probability and the severity of an accident. The damages that the victim suffers are privately observed, and will be verified at a cost if the case is litigated. While finely tuned damage awards induce the injurer to take appropriate precautions ex ante, they increase the probability that the litigants will disagree about the case, and thereby aggravate the settlement process. Flat damage awards reduce the level of costly litigation, but lead to underinvestment in precautions. We show that when the litigation costs are small the optimal award is finely tuned to the actual damages, and when litigation costs are large the optimal award is a flat penalty. Applications to scheduled damages and workers' compensation are discussed.
Kathryn E. Spier, A Note on Joint and Several Liability: Insolvency, Settlement, and Incentives, 23 J. Legal Stud. 559 (1994).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Presentation
James D. Dana, Jr. & Kathryn E. Spier, Designing a Private Industry: Government Auctions with Endogenous Market Structure, 53 J. Pub. Econ. 127 (1994).
Categories:
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Economics
,
Law & Economics
Type: Article
Abstract
This paper considers government mechanisms for auctioning production rights in which both the winners and the market structure, doupoly (dual-sourcing), monopoly (sole-sourcing), or government-owned production, are a function of the bids. In designing the optimal mechanism, the government considers the tradeoffs among consumer surplus, producer surplus, and revenue. Under incomplete information, doupoly is implemented less frequently, and government production more frequently, than under complete information. When bidders are symmetric, the optimal mechanism can be implemented as a modified second-price auction. Applications to privatization, deregulation, and defense procurement are discussed.
Enrico Perotti & Kathryn E. Spier, Capital Structure as a Bargaining Tool: The Role of Leverage in Contract Renegotiation, 83 Law & Econ. Rev. 1131 (1993).
Categories:
Banking & Finance
,
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Contracts
,
Economics
,
Shareholders
,
Corporate Bankruptcy & Reorganization
,
Law & Economics
Type: Article
Abstract
This paper presents a strategic model of temporarily high leverage. When the repayment of senior claims depends in part upon further investment, shareholders may be able to alter credibly their incentives to invest through an exchange of junior debt for equity and thereby force concessions from senior creditors. The authors focus on the conflict between shareholders and risk-averse workers and show that this strategic use of debt leads to an inefficient allocation of risk. They characterize conditions under which firms will undergo leveraged recapitalizations, their choice of debt instruments, and the dynamics of their capital structure.
James D. Dana, Jr. & Kathryn E. Spier, Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation, 9 J.L. Econ. & Org. 349 (1993).
Categories:
Legal Profession
,
Disciplinary Perspectives & Law
,
Civil Practice & Procedure
Sub-Categories:
Litigation & Settlement
,
Law & Economics
,
Legal Services
Type: Article
Kathryn E. Spier, Defense Procurement: Politics, Management, and Incentives: Discussion, in Incentives in Procurement Contracting 22 (James Leitzel & Jean Tirole eds., 1993).
Categories:
Banking & Finance
,
Government & Politics
Sub-Categories:
Contracts
,
Military, War, & Peace
,
Politics & Political Theory
Type: Book
Abstract
This volume presents a nontechnical treatment of issues that arise in procurement contracting, with an emphasis on major weapons systems procurement.
Kathryn E. Spier, Incomplete Contracts and Signaling, 23 RAND J. Econ. 432 (1992).
Categories:
Banking & Finance
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Law & Economics
Type: Article
Abstract
This article presents a principal-agent model in which asymmetric information leads to contractual incompleteness. I show that in the presence of transactions costs, incompleteness may act as a signal of the principal's type. Two types of transactions costs are considered: those incurred ex ante (drafting costs) and those incurred ex post (enforcement or verification costs). I prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does.
Kathryn E. Spier, The Dynamics of Pretrial Negotiation, 59 Rev. Econ. Stud. 93 (1992).
Categories:
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
Sub-Categories:
Litigation & Settlement
,
Law & Economics
Type: Article
Abstract
A model of sequential bargaining with one-sided incomplete information is analyzed where, if an agreement is not reached, the agents go to court. A “deadline effect” emerges where much settlement occurs just prior to the trial, and many cases proceed to court. If fixed costs are incurred during each bargaining period, a “U-shaped” pattern of settlement emerges. These patterns persist in the limit as the time between offers approaches zero. A model with an endogenous trial date is also considered, and it is shown that even with complete information, there exist inefficient equilibria where disputes are resolved in court.

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