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The Tradeoffs between Regulation and Litigation: Evidence from Insurance Class Actions

Law and economics scholars generally view regulation and litigation as substitutes in the task of deterring potentially harmful conduct. Existing normative models suggest that the desirable mix of regulation and litigation will depend on a number of variables, but all largely agree that, on the margin, optimality requires that as public regulation increases, private litigation should decline and vice versa. To investigate whether this condition holds, we examine the factors that affect plaintiffs attorneys' decisions about where and when to file class actions using a unique dataset covering the class action experience of 130 insurance companies during the period 1992 to 2002. We find no evidence to support the proposition that public regulation and private litigation function as substitute channels to deter harmful behavior. In fact, we find some evidence that litigation and regulation tend to piggy-back on each other at least in the insurance industry. More important in the attorneys' filing decisions is whether or not cases regarding the same general allegation and cases filed in the same state have been successful in the past.