Optimal plaintiff incentives when courts are imperfect

The incentives of a plaintiff in a lawsuit are affected by a variety of legal rules. One leading example is the proportion of the fine imposed on the defendant that is awarded to the plaintiff. Another is the identity of the plaintiff himself: private litigants are motivated by the prospect of receiving damages, while government employed plaintiffs (such as public prosecutors and employees of regulatory agencies) are instead rewarded (if at all) by career advancement. The paper examines the interaction between court characteristics and plaintiff incentives on the deterrence provided by contracts/laws/regulations. It shows that a key determinant of the optimal level of plaintiff incentives is the extent to which a party arguing “against the facts” is able to influence the court, relative to the party arguing with the facts. When the court is more susceptible to the influence activities of the party arguing against the facts, it is generally optimal to restrict plaintiff incentives. Implications for the use of split-award statutes, loser-pays rules, class action lawsuits, and public enforcement are discussed. In more general terms, the paper makes precise an avenue via which legal rules affect the efficacy of a legal system.