Rent Seeking and Bias in Appeals Systems

Abstract

We analyze a litigation contest in which plaintiff and defendant seek to win in trial court, and the losing litigant may appeal. In our setup, the appeals court's judgment depends on the trial court's judgment, the merits of the litigants' arguments, and their efforts in the appeals stage. We find that the possibility of appeal increases the favorite's probability of winning as compared to that in a single-stage system, as the favorite has higher effort incentives in the first-instance authority than the underdog. Moreover, we show that the possibility of appeal may increase total rent-seeking efforts and make the case less likely to be tried, or that it surprisingly may have the opposite effects, and how the direction of these effects depends on the model parameters.

On the role of emotions in experimental litigation contests

“…Furthermore, conditional on having initiated the contest, Players B chose high effort levels. As a comparison, the last row of Table 3 displays the equilibrium effort choices for the case where both players are risk neutral and only care about monetary payoffs, which were obtained using Friehe and Wohlschlegel (2017). The actually observed effort choices significantly exceed the point predictions of the theoret-ical model (p < .01, according to the Wilcoxon signed-rank test).…”

“…If points have been transferred, Player B can, in Stage 3, decide whether and how many points to invest in a stylized litigation contest that builds on the theoretical model in Friehe and Wohlschlegel (2017). Higher investment implies a higher probability to reverse the transfer of points.…”

“…While Player B can select a level of effort from the set [10, 30], Player A's investment in any contest is fixed at 16 points in order to rule out strategic uncertainty, which is known to make effort choices in experimental contests very heterogeneous and to produce results that are hard to interpret (see Dechenaux et al 2015). An effort level of 16 results as the defendant's equilibrium effort in Friehe and Wohlschlegel (2017) when both litigants appeal a judgment in favor of the other party. In the experiment, the plaintiff's probability of winning the litigation contest can be stated as…”

“…If Player B was risk neutral and motivated only by monetary payoff consequences, her optimal trial effort choices, based on Player A's exogenously given effort, can be obtained using the theoretical model in Friehe and Wohlschlegel (2017). However, the participants' decisions are likely to be driven also by behavioral considerations: Against the background of the preceding literature of fair intentions, we anticipate that players will invest more effort and initiate the litigation contest with a higher likelihood and higher effort when Player A intentionally took points from Player B.…”