Financially-Constrained Lawyers

Abstract

Financial constraints reduce the lawyer's ability to file lawsuits and bring cases to trial. As a result, access to justice for true victims, bargaining impasse, and potential injurers' precaution might be affected. This paper studies civil litigation using a strategic model that allows for asymmetric information, financially-constrained lawyers, third-party lawyer lending, and a continuum of plaintiff's types. We provide methodological contributions to the law and economics literature by generalizing seminal models of legal disputes (Katz, 1990; Bebchuk, 1988). We present formal analysis of the three mutually-exclusive perfect Bayesian equilibrium classes: Mixed-strategy, pure-strategy, and boundary equilibria. We identify necessary conditions for the existence of each class. In particular, the mixed-strategy class arises in a state of the world characterized by lawyers facing strong financial constraints or defendants facing a high threat of frivolous lawsuits. Across equilibrium classes, accidents do occur and bargaining impasse is observed. Access to justice is denied to some true victims under the mixed-strategy and boundary equilibria. We then extend our tractable model to study the social welfare effects of policies aimed at relaxing lawyers' financial constraints. We establish sufficient conditions for a welfare-reducing effect: When the positive impact on access to justice is weak and the potential injurers are overdeterred, these policies are welfare reducing.