JB Heaton, ‘Litigation Funding: An Economic Analysis’

Basic economic analysis of litigation funding shows that risk-neutral plaintiffs without budget-constraints will not accept funding unless they are pessimistic relative to the funder. Risk aversion makes a plaintiff who shares probabilistic beliefs with the funder act observationally-equivalent to a pessimistic, risk-neutral plaintiff, so she will accept funding as well. An important benefit of litigation funding is that it moves actions closer to risk-neutral outcomes, and therefore closer to the plaintiff’s perceived ‘merits’, something that is of underemphasized importance in law and procedure. The best funding outcomes (for investors) are likely when plaintiffs are risk averse or budget-constrained. Poor outcomes are more likely when funded plaintiffs are risk neutral and unconstrained.

Heaton, JB, Litigation Funding: An Economic Analysis (January 19, 2018).

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