Warren F. Schwartz

The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization

The treaty creating the World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) dispute resolution system, which contained no formal sanctions for breach of agreement as a practical matter, with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system and argue that the institutionalization of a sanctioning mechanism was not motivated by a perceived need to increase the penalty for violations, but rather by a need to decrease the penalty. In particular, the GATT system relied on unilateral retaliation and reputation to police the bargain. Toward its end, unilateral retaliation became excessive and interfered with opportunities for efficient breach. The WTO mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under WTO law and ensures that sanctions are not set too high.

Advantage Defendant: Why Sinking Litigation Costs Makes Negative‐Expected‐Value Defenses but Not Negative‐Expected‐Value Suits Credible

We revisit Lucian Bebchuk’s 1996 claim that plaintiffs can use the sequential nature of litigation to extract a positive settlement from a negative‐expected‐value suit. We make three claims. First, this result is heavily dependent on the specific bargaining game he uses. Second, in an alternating‐offer bargaining game, the outside‐option principle demonstrates that this cost‐sinking strategy will not allow a negative‐expected‐value plaintiff to extract a positive settlement offer. Third, this cost‐sinking strategy, however, can be effective for a defendant using a negative‐expected‐value defense.

CAN SUITS WITH NEGATIVE EXPECTED VALUE REALLY BE PROFITABLE

This is the second of two closely related articles The first is Warren F. Schwartz, Long-Shot Class Actions: Toward a Normative Theory of Legal Uncertainty , 8 L EGAL T HEORY 297 (2002). challenging the widely held belief that plaintiffs, through the settlement process, are realizing “too much” from “unmeritorious” claims. No one has offered a systematic justification for this belief. It appears, however, to be based upon the effects produced by three characteristics of the settlement process: (1) the outcome of litigation is uncertain; (2) when, as in a class action, the stakes are very high for a defendant, the defendant will be very risk-averse and will consequently be prepared to pay in settlement much more than the expected value of its liability; and (3) litigation is costly.