Abstract
Although all legal systems use some form of prejudgment or post-judgment interest, there is no substantive law & economics literature providing for a comprehensive theory on the impact, functioning and assessment of the judicial interest rate. Mainstream legal scholarship has usually dealt with it as having neutral effects on private and social costs. In this paper we show that the issue is theoretically-wise far more complex and it has a definite influence on legal policy. Due to asymmetric opportunity costs for plaintiff and defendant, judicial interest rates may bring about improper delay of proceedings and/or decouple damages from recovery. Both effects influence the number of settlements and suits. On this ground, we compare different institutional settings from an economic perspective and conclude that the appropriate mechanism depends on the alternative available policy instruments, namely rules of procedure, court fees or appropriate setting of damages. Moreover, we will suggest that abolishing the statutory setting of prejudgment interest may be a worth considering proposal.
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