Incentives to Invest in Litigation and the Superiority of the Class Action

Abstract

We formally demonstrate the general case for class action in a rent-seeking contest model, explaining why separate action adjudication is biased in the defendant’s favor and collective adjudication is bias-free. Separate action bias arises from the defendant’s investment advantage in capitalizing on centralized control over the aggregate (classwide) stake in the common question defense, while the plaintiff, with only an individual recovery at stake, spends much less. Class action eliminates bias by enabling both parties to make their best case through centralized optimal classwide investments. Our social benefit-cost analysis shows that class action surpasses alternative methods for achieving bias-free adjudication.