Litigations with Multiple Plaintiffs: the Case of Effort Externality

In this paper, we analyze the disputing parties’ litigation behavior in a sequential/multiple plaintiff context, focusing on “effort externality”. Effort externality arises when the first plaintiff’s investigative effort uncovers critical information which can be shared and used by subsequent plaintiffs in launching a successful trial case against the same defendant. Postulating that the information transmission is greater through trial than through settlements, we find that the defendant is more willing to settle with the initial plaintiff than would be suggested by the single plaintiff model. Thus, the external effect spills back over to first plaintiff. However, if the externality is substantial, there may be a significant second-mover advantage on the part of the plaintiffs, which result in delays in bringing suits. Finally, this informational/effort externality is shown to lead to plaintiffs opting-out of coordinated class actions.