Bibliography: A. Mitchell Polinsky, Steven Shavell, Costly Litigation and Optimal Damages, NBER Working Paper No. 18594, December 2012. Also issued as also Issued as Stanford Law and Economics Olin Working Paper no. 436; Harvard Law and Economics Olin Working Paper no. 739 (2012).
A basic principle of law is that damages paid by a liable party should equal the harm caused by that party. However, this principle is not correct when account is taken of litigation costs, because they too are part of the social costs associated with an injury. In this article we examine the influence of litigation costs on the optimal level of damages, assuming that litigation costs rise with the level of damages.