CADR and Settlement of Claims. A Few Economic Observations

Abstract

This paper starts from a hypothetical case whereby one consumer has lost a relatively limited amount of money as a result of negligence of the bank in the wake of the financial crisis. The consumer will not file suit because of the so-called rational disinterest problem and because the losses are dispersed. The consumer is, however, not alone and many face similar problems. Hence the paper argues that a market failure arises and the remainder of the paper questions how that market failure can be remedied. One possibility is to look for solutions to lower the barriers to access to justice, for example through a transfer of claim, legal expenses insurance or conditional fee arrangements. The pros and cons of each of those solutions are discussed from a law and economics perspective. The other problem is the one of dispersed losses resulting in rational disinterest of the consumer. One solution may be group litigation or a representative suit. Other solutions may go in the direction of consumer ADR. The benefits of consumer ADR are discussed both from the consumers as well as from society’s perspective. Finally the paper continues by addressing specific problems that may arise in the settlement of mass claims related to the incentives of lawyers and to the incentives of the judiciary.