Litigation Finance at Trial: Model and Data

<div> Litigation finance is a relatively new investment vehicle focused on legal disputes, raising important questions about its impact on legal practice and, critically, on access to justice. <span>We present a theoretical model of litigation finance, grounded in empirical insights about litigation, to derive key insights for this burgeoning field, particularly concerning its potential to both expand and challenge pathways to legal recourse.&nbsp;</span><span>Based on an extensive dataset of civil lawsuits, we first present stylized empirical facts related to litigation, highlighting variations that underscore the uncertainties potentially hindering legal access.&nbsp;</span><span>Grounded in these insights, we build a base model for litigation and a model extension that includes litigation finance.&nbsp;</span><span>Using these models, we arrive at three main insights:&nbsp;</span><span>First, litigation finance can expand access to justice by enabling high-risk lawsuits - preferred by funders compared to more risk-averse law firms - that might otherwise lack funding. &nbsp;</span><span>However, this expansion also challenges the legal system by potentially increasing the overall number of lawsuits.&nbsp;</span><span>Second, we observe that high variability in case durations leads to significant uncertainty in process costs. &nbsp;</span><span>This causes more risk-averse law firms to invest more heavily to reduce outcome variance, disproportionately benefiting plaintiffs but also highlighting risks associated with law firm consolidation.&nbsp;</span><span>Third, litigation finance tends to increase the amount spent on litigation. &nbsp;</span><span>These extra costs are typically borne by the funder alone, as our model suggests cost-sharing between funders and law firms is sub-optimal.&nbsp;</span><span>In summary, while litigation finance has the potential to enhance access to justice, particularly for riskier cases, its tendency to increase court workloads necessitates consideration of new policies to manage the potential strain on judicial resources.</span> </div>