Abstract
Civil disputes feature parties with biased incentives acquiring evidence with costly effort. Evidence may then be revealed at trial or concealed to persuade a judge or jury. Using a persuasion game, we examine how a litigant’s risk preferences influence evidence acquisition incentives. We find that high risk aversion depresses equilibrium evidence acquisition. We then study the problem of designing legal rules to balance good decision making against the costs of acquisition. We characterize the optimal design, which differs from equilibrium decision rules. Notably, for very risk-averse litigants, the design is “over-incentivized” with stronger rewards and punishments than in equilibrium. We find similar results for various common legal rules, including admissibility of evidence and maximum awards. These results have implications for how rules could differentiate between high risk aversion types (e.g., individuals) and low risk aversion types (e.g., corporations) to improve evidence acquisition efficiency.
Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion