Faculty Bibliography

This paper explores whether platform liability should be strict or negligence based. In the model, two-sided platforms get revenue from two sources: selling products or services to consumers and selling advertising (or information) to others. There are indirect network effects: higher consumer participation generates more revenue from advertising or data sales. Platforms may take costly and unobservable precautions to reduce risks of consumer harm. If network effects are weak (strong), the price charged to consumers is positive (zero). If the consumers’ price is positive, then both strict liability and negligence lead to efficient precautions and consumer participation. If the price is zero, then strict liability stimulates more user participation and higher social welfare than the negligence rule. Bilateral care (i.e., consumer precautions), third parties (e.g., government agencies, lawyers), and platform market power are also examined.

When firms collude and charge supracompetitive prices, consumers can bring antitrust lawsuits against the firms. When the litigation cost is low, firms accept the cost as just another cost of doing business, whereas when the cost is high, the firms lower the price to deter litigation. Class action is modeled as a mechanism that allows plaintiffs and attorneys to obtain economies of scale. We show that class actions, and the firms' incentive to block them, may or may not be socially desirable. Agency problems, settlement, fee-shifting, treble damages, public enforcement, and sustaining collusion through repeat play are also considered.

The paper analyzes the effects of holding firms liable for non-disclosure of material information when raising capital. We develop a model in which a privately-informed entrepreneur can choose to withhold information from prospective investors when issuing and selling stock and the investors can bring suit against the firm ex post for (alleged) non-disclosure. The damage payment received by the investors is partially offset by the reduced value of their equity stake. The analysis shows that the equilibrium depends on, among others, (1) the amount of personal capital the entrepreneur has to commit, (2) the frequency with which the entrepreneur is privately informed (the degree of adverse selection), (3) the size of damages payment, and (4) the cost of litigation. Court errors decrease social welfare by weakening deterrence while litigation costs may increase social welfare by deterring the inefficient types or decrease social welfare through wasteful litigation spending. The effects of liability or class action waivers and holding entrepreneurs personally liable for non-disclosure are also explored, and various normative and empirical implications are discussed.

Should platforms be held liable for the harms suffered by users? A two-sided platform enables interactions between firms and users. There are two types of firm: harmful and safe. Harmful firms impose larger costs on the users. If firms have deep pockets then platform liability is unnecessary. Holding the firms liable for user harms deters the harmful firms from joining the platform. If firms are judgment proof then platform liability plays an instrumental role in reducing social costs. With platform liability, the platform has an incentive to (1) raise the interaction price to deter harmful firms and (2) invest resources to detect and remove harmful firms from the platform. The residual liability assigned to the platform may be partial instead of full. The optimal level of platform liability depends on whether users are involuntary bystanders or voluntary consumers, and the intensity of platform competition.

Many firms require consumers, employees, and suppliers to sign class action waivers as a condition of doing business with the firm, and three recent US Supreme Court cases, Concepcion, Italian Colors, and Epic Systems, have endorsed companies’ ability to block class actions through mandatory individual arbitration clauses. Are class action waivers serving the interests of society or are they facilitating socially harmful business practices? This paper synthesizes and extends the existing law and economics literature by analyzing the firms’ incentive to impose class action waivers. While in many settings the firms’ incentive to block class actions may be aligned with maximizing social welfare, in many other settings it is not. We examine conditions in which class action waivers can compromise product safety, facilitate anticompetitive conduct, and support harmful employment practices. Our analysis delivers a more nuanced, policy-based critique of the recent US Supreme Court cases, highlights several new unresolved issues, and identifies future challenges for legal scholarship.

A firm licenses a product to overlapping generations of heterogeneous consumers. Consumers may purchase the product, pirate/steal it, or forego it. Higher consumer types enjoy higher gross benefits and are caught stealing at a higher rate. The firm may commit to an out-of-court cash settlement policy that is “soft” on pirates, so high-types purchase and low-types steal. This facilitates price discrimination. Firm profits rise if the firm bundles a license agreement with the cash settlement. However, requiring pirates to sign license agreements as part of the settlement has ambiguous welfare effects and may deter the entry of more efficient competitors.

A firm sells a dangerous product to a population of heterogeneous consumers. Higher consumer types enjoy higher gross benefits from product use but suffer accidents more often. The firm invests resources to reduce the frequency of accidents. When the consumer's net benefit function (gross benefits minus expected harms) is decreasing in consumer type, the firm contractually accepts liability for accident losses and invests efficiently in product safety. When the consumer's net benefit function is increasing in consumer type, the firm contractually disclaims liability for accident losses and under-invests in product safety. Legal interventions, including products liability and limits on contractual waivers and disclaimers, are necessary to raise the level of product safety.

This paper studies the design of enforcement policies to detect and deter harmful short-term activities committed by groups of injurers. With an ordered-leniency policy, the degree of leniency granted to an injurer who self-reports depends on his or her position in the self-reporting queue. By creating a "race to the courthouse," ordered-leniency policies lead to faster detection and stronger deterrence of illegal activities. The socially-optimal level of deterrence can be obtained at zero cost when the externalities associated with the harmful activities are not too high. Without leniency for self-reporting, the enforcement cost is strictly positive and there is underdeterrence of harmful activities relative to the first-best level. Hence, ordered-leniency policies are welfare improving. Our findings for environments with groups of injurers complement Kaplow and Shavell's (1994) results for single-injurer environments. Experimental evidence provides support for our theory.

Two risk‐averse litigants with different subjective beliefs negotiate in the shadow of a pending trial. Through contingent contracts, the litigants can mitigate risk and/or speculate on the trial outcome. Contingent contracting decreases the settlement rate and increases the volume and costs of litigation. These contingent contracts mimic the services provided by third‐party investors, including litigation funders and insurance companies. The litigants (weakly) prefer to contract with risk‐neutral third parties when the capital market is transaction‐cost free. However, contracting with third parties further decreases the settlement rate, increases the costs of litigation, and may increase the aggregate cost of risk bearing.

Before filing suit, a plaintiff can take a financial position in a defendant firm. A short position benefits the plaintiff by transforming a negative expected-value claim into a positive expected-value one and by enhancing the claim's settlement value. If the capital market is less than strong-form efficient, the plaintiff also benefits directly from the decline in the defendant's stock price. When the defendant is privately informed about the case's merits, bargaining failures can arise. While aggressive short-selling benefits the plaintiff at the expense of the defendant, moderate levels of short-selling can benefit the defendant and raise the settlement rate.

This paper reports the results of an experiment designed to assess the ability of an enforcement agency to detect and deter harmful short-term activities committed by groups of injurers. With ordered-leniency policies, early cooperators receive reduced sanctions. We replicate the strategic environment described by Landeo and Spier (2018). In theory, the optimal ordered-leniency policy depends on the refinement criterion applied in case of multiplicity of equilibria. Our findings are as follows. First, we provide empirical evidence of a "race-to-the-courthouse" effect of ordered leniency: Mild and Strong Leniency induce the injurers to self-report promptly. These findings suggest that the injurers' behaviors are aligned with the risk-dominance refinement. Second, Mild and Strong Leniency significantly increase the likelihood of detection of harmful activities. This fundamental finding is explained by the high self-reporting rates under ordered-leniency policies. Third, as a result of the increase in the detection rates, the averages fines are significantly higher under Mild and Strong Leniency. As expected when the risk-dominance refinement is applied, Mild Leniency exhibits the highest average fine.

With imperfect private monitoring, a firm selling two experience goods can increase both producer and consumer surplus by bundling. Bundling constrains consumers to buy two products, making consumers better informed and ensuring that they use tougher punishment strategies. Both increased monitoring and increased punishment benefit other consumers, so bundling overcomes a free‐rider problem. The social value of bundling is even larger if consumers cannot attribute a negative signal to the specific product that generated it, or if one of the two goods is a durable and the other is a complementary nondurable. Our results are robust to mixed bundling.

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.

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.

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.

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.

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.

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.

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.

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.

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.

This article studies the judicial resolution of business deadlock. Asset valuation, a necessary component of business divorce procedures, can pose serious problems in cases of closely-held businesses, such as general partnerships and limited liability companies (LLCs). Courts face the challenge of designing valuation mechanisms that will trigger the owners to truthfully reveal their private information. We theoretically and experimentally assess the ex post judicial design and properties of judicially-mandated Shotgun and Private Auction mechanisms. In the former mechanism, the court would require one owner to name a buy-sell price, and the other owner would be required to either buy or sell his or her shares at the named price. In the latter mechanism, the court would mandate both owners to simultaneously submit a price to buy the other owner's assets. Our experimental findings support our theory: The Shotgun mechanism with an informed offerer is superior to the Private Auction in terms of an equity criterion. In the Shotgun mechanism, the informed offerer has an incentive to truthfully reveal his private information and, as a result, an equitable outcome is more likely to be achieved. The analysis presented in this article provides an equity rationale for the judicial implementation of the Shotgun mechanism in business divorce cases, and demonstrates the empirical feasibility of our proposal.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

By bundling experience goods, a manufacturer can more easily maintain a reputation for high quality over time. Formally, we extend Klein and Lefler's (1981) repeated moral hazard model of product quality to consider multi-product firms and imperfect private learning by consumers. When consumers are small, receive imperfect private signals of product quality, and have heterogeneous preferences over available products, then purchasing multiple products from the same firm makes consumers more effective monitors of the firm's behavior. These consumers observe more signals of firm behavior and detect shirking with a higher probability, which creates stronger incentives for the firm to produce high quality products. By constraining all of the firm's consumers to use more effective monitoring and punishment strategies, bundling creates an even stronger incentive for a multi-product firm to produce high quality products. The impact of bundling on incentives is even greater when consumers cannot identify which of the goods is responsible for poor overall product performance.

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.

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.

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.

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.

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.

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.

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.

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.

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.