welfare dominance an application to commodity taxation in this paper the authors propose a method to identify commodity tax changes that will be favored by all individuals who can agree on certain weak assumptions with regard to the social welfare function the method is based on an extension of the criterion of second degree stochastic dominance and is illustrated using data from israel copyright 1991 by american economic association

economic dynamics in the malthusian era evidence from the 1609 spanish expulsion of the moriscos we investigate economic dynamics in the malthusian era using the 1609 expulsion of moriscos from spain sharp population declines in former morisco districts were accompanied by decreased output and increased per capita output while these short run results are consistent with standard malthusian predictions malthusian convergence was delayed up to 1786 in former morisco districts archival sources and historical accounts suggest extractive institutions and cultural differences may have contributed to delayed convergence in population and output per capita this historic episode provides an unusually rich setting to examine malthusian dynamics highlighting the potential for sustained differences in per capita output in the malthusian era

joint confidence intervals for income shares and lorenz curves in a recent paper beach and davidson 1983 extended the principles of statistical inference to lorenz curves and income shares by establishing the asymptotic distribution and covariance structure of a vector of lorenz curve ordinates corresponding to a set of quantile abscissae one can thus use the lorenz curve and income shares no longer just as descriptive devices for summarizing distribution information but now also as analytical tools for comparing alternative distributions and carrying out conventional statistical inference on them it would clearly be desirable however to extend and complement this work by providing a method for computing a set of joint confidence intervals about these income shares and for illustrating graphically a joint confidence band about a set of estimated lorenz curve ordinates the present paper provides a new and simple technique for doing this when analyzing differences between sets of income shares or lorenz curves one typically wants to elicit more detailed information than is provided by a standard joint chi square test on the overall set of shares that is when the hypothesis of two sets of shares being the same is rejected we generally want to know further which particular differences in shares are different from zero and of these nonzero differences which are positive and which negative savin 1980 a natural way of providing such information is through multiple comparison procedures developed in this paper in a recent work richmond 1982 has developed a general method of finding multiple comparison intervals that is particularly suited to the present problem and in this situation appears to dominate other conventional alternatives in contrast for example to scheff s s projection method richmond s approach focuses on a set of primary points of interest income shares among a more general set of points including the lorenz curve ordinates and optimizes the joint confidence interval lengths on this primary set of points since estimated lorenz curve ordinates are built up from underlying income shares these shares perhaps further supplemented are natural choices for the primary set the method however also provides a joint confidence band that geometrically bounds the set of lorenz curve ordinates and interpolated segments between them the present

a new and robust subgame perfect equilibrium in a model of triadic power relations abstract this note presents a new subgame perfect equilibrium in an infinitely repeated game which has basu s triadic model as the stage game oxford econ pap 38 1986 259 the payoff for the laborer is the same as in basu s model the equilibrium is more robust than the naqvi and wemhoner s solution j dev econ 47 1995 191 in the sense that the equilibrium does not require the same high degree of rationality simple well known strategies are applied and both the landlord and the merchant are better off than in the stage game in the equilibrium outcome the merchant receives a share of the extra profit from the extortionary labor contract

decomposing lorenz and concentration curves we decompose the lorenz curve lc and its associated concentration curve cc by population subgroups to illustrate these decompositions we examine changes in earnings inequality among west germans east germans and foreign guest workers during the recent german unification we show that east german earnings have become less concentrated in the lower deciles of the overall german earnings distribution whereas the earnings of west germans and foreign guest workers have become more concentrated in the lower deciles

sovereign debt and joint liability an economic theory model for amending the treaty of lisbon as the euro area crisis drags on it is evident that a part of the problem lies in the architecture of debt within the euro area this study argues that at least part of the debt problem could be addressed through limited cooperative action entailing appropriately structured contracts generating cross country liability for sovereign debt incurred by individual nations within the european union such agreements are currently proscribed by the treaty of lisbon we construct a game theoretic model demonstrating that there exist self fulfilling equilibria which are pareto superior to the existing outcome and which would come into existence if cross country debt liabilities were permitted

historical frontiers and the rise of inequality the case of the frontier of granada the authors acknowledge financial support from the spanish ministry of science and technology grant eco2009 13357 the spanish ministry of economics and competitiveness grant eco2012 35430 and the andalusian council of innovation and science excellence project sej 4546

power coercion and the games landlords play abstract if an agent introduces triadic relationships through a threat when relations are dyadic without this threat and if by such a threat this agent reduces the welfare of others then this agent may be said to exercise power we construct a minimal model with three agents landlord laborer and merchant and three commodities and demonstrate that in the subgame perfect equilibrium of a finite move extensive form game of complete and perfect information there is no powerful individual we show next that in the infinitely repeated game there exists a subgame perfect equilibrium in which the landlord wields power

price and advertising as signals of quality when some consumers are informed abstract a monopoly produces a good of either high or low quality some consumers are informed about quality while others are uninformed and infer quality through the firm s marketing strategy the model is an extension of bagwell and riordan american economic review 81 1 1991 224 dissipative advertising combined with a high price is an efficient signal of quality when the marginal cost of production of high quality is low if the proportion of informed consumers is low quality is signaled only through a high price however if this proportion is intermediate quality is signaled by both advertising and price

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

oligopoly limit pricing we expand milgrom and roberts 1982 limit pricing model to allow for multiple incumbents each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent s preentry price we find that incumbents are unable to coordinate deception which results in a separating equilibrium in which preentry prices are not distorted further introducing the refinement of unprejudiced beliefs we show that the no distortion equilibrium is the only refined separating equilibrium plausible pooling equilibria fail to exist or involve downward distortions in preentry prices

testing for marginal changes in income distributions with lorenz and concentration curves asymptotically distribution free statistical tests for comparing absolute and relative lorenz and concentration curves are provided the procedures do not require independent samples and can be used to test for marginal changes in income distributions the tests are illustrated using a large sample of tax returns that have been randomly selected for audit by the internal revenue service the tests reveal the marginal effects of systematic underreporting of income and tax liabilities on the u s income distribution copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

signaling and the design of delegated management contracts for public utilities this article analyzes the shape of contracts between local governments and the contractors they hire to run public facilities on their behalf governments are privately informed about the quality of the facility while risk neutral contractors undertake a non verifiable operating eort the design of the contract signals the quality of the facility in such a way that the better this quality the greater the share of operating risk kept by the government this feature reduces the agent s marginal incentives creating a trade o between signaling and moral hazard we provide extensions of our framework in several directions allowing for risk aversion on the agent s side double moral hazard and political delegation the model is supported by some stylized facts from the water industry

legal fee restrictions moral hazard and attorney rents abstract when attorney effort is unobservable and certain other simplifying assumptions such as risk neutrality hold it is efficient for an attorney to purchase the rights to a client s legal claim however the american bar association model rules of professional conduct prohibit this arrangement we show that this ethical restriction which is formally equivalent to requiring a minimum fixed fee of zero can create economic rents for attorneys even though they continue to compete along the contingent fee dimension the contingent fee is not bid down to the zero profit level because such a fee does not induce sufficient attorney effort we thereby provide a political economy explanation for these restrictions

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

ranking income distributions a large variety of policy questions involve choices between social states and a consequent ordering of the feasible alternatives when these social states are related to the levels of welfare experienced by individuals or households two central issues stand out in determining the relative desirability of different social outcomes one of these is the essentially positive exercise of achieving comparability between households with different characteristics such as composition or preferences operating in different environments for example facing different price structures the other concerns the normative judgments implicit in the evaluation of alternative allocations of resourcesthe emphasis placed on inequality between households and the extent to which greater inequality can be compensated by higher average living standards this paper focuses on the second of these issues and in doing so we abstract from the problem of household comparability by considering a population of n households identical in all respects except for their incomes the question of ordering social states then becomes one of ranking income distributions over a group of anonymous households or individuals borrowing the usual assumptions imposed on consumer preferences we may suppose that a social ordering of income distributions can be represented by a welfare function 2

slavery education and inequality abstract we investigate the effect of slavery on the current level of income inequality across us counties we find that a larger proportion of slaves over population in 1860 persistently increases inequality and in particular inequality across races we also show that a crucial channel of transmission from slavery to racial inequality is human capital accumulation i e current inequality is primarily influenced by slavery through the unequal educational attainment of blacks and whites finally we provide suggestive evidence that the underlying links run through the political exclusion of former slaves and the resulting negative influence on the local provision of education

the economics of labor coercion the majority of labor transactions throughout much of history and a significant fraction of such transactions in many developing countries today are coercive in the sense that force or the threat of force plays a central role in convincing workers to accept employment or its terms we propose a tractable principal agent model of coercion based on the idea that coercive activities by employers or guns affect the participation constraint of workers we show that coercion and effort are complements so that coercion increases effort but coercion always reduces utilitarian social welfare better outside options for workers reduce coercion because of the complementarity between coercion and effort workers with a better outside option exert lower effort in equilibrium and thus are coerced less greater demand for labor increases coercion because it increases equilibrium effort we investigate the interaction between outside options market prices and other economic variables by embedding the coercive principal agent relationship in a general equilibrium setup and studying when and how labor scarcity encourages coercion general market equilibrium interactions working through the price of output lead to a positive relationship between labor scarcity and coercion along the lines of ideas suggested by domar while interactions those working through the outside option lead to a negative relationship similar to ideas advanced in neo malthusian historical analyses of the decline of feudalism in net a decline in available labor increases coercion in general equilibrium if and only if its direct partial equilibrium effect is to increase the price of output by more than it increases outside options our model also suggests that markets in slaves make slaves worse off conditional on enslavement and that coercion is more viable in industries that do not require relationship specific investment by workers

why were workers whipped pain in a principal agent model one reason a person hurts another is to get that person to do something this paper uses a model to show that threatening pain can be rational and that pain is inflicted upon people who are poor in the sense of having bad alternatives the model corrects a confusion in previous models of slavery gives an explanation of why child and not adult laborers were beaten during the industrial revolution and prompts a discussion of the dangers of rational choice modeling copyright 1990 by royal economic society

triadic power relations in rural nepal abstract we generalise basu s model of triadic power for one landlord and multiple merchants the landlord s threat towards a labourer becomes credible in the original stage game for multiple landlords and merchants we generalise more recent solutions we estimate a reduced form of the model where equilibrium rural wages are a function of the number of landlords distance to merchants characteristics of the labourers and the distance to external markets we apply living standards measurement study data from nepal and find support for the triadic model in particular the influence via the merchants depends on the number of landlords

inference tests for gini based tax progressivity indexes distribution free statistical inference procedures for changes in lorenz and gini based indexes of tax progressivity are developed and applied related but distinct tests for the reynolds smolensky index of residual progression and the kakwani index of liability progression are provided the inference procedures are illustrated by applying them to luxembourg income study microdata for sweden the united kingdom and the united states before and after periods of tax reform in each country a finding of significant change depends on the choice among progressivity indexes no single index exhibits a consistent pattern of significant change in all countries across time

labor coercion and the accumulation of human capital abstract this paper examines the effect of labor coercion on human capital accumulation we use micro data from puerto rico where unskilled laborers were forced to work for landowners during 1849 1874 using variation in municipality level suitability for coffee cultivation and international coffee prices we estimate the response of schooling to exogenous increases in relative demand for unskilled labor in regimes with and without forced labor during the coercive regime increased coffee prices had no effect on individuals literacy rates in coffee growing regions following the abolition of forced labor in 1874 similar changes in coffee prices reduced literacy rates by 12 consistent with a diminished skill premium in the free labor market regime relative to the coercive period

the impact of connectivity on market interlinkages evidence from rural punjab up to the 1980s it was generally accepted that many key issues in agrarian development could not be studied without an understanding of market interlinkages recently however this theory has lost its importance in development literature based on a household level survey from rural pakistan this paper seeks to re introduce the importance of interlinkages by illustrating their exploitative potential particularly in unequal isolated villages where landlords are essentially monopolist monopsonist the solution proposed is to break isolation making use of an exogenous shock found in the construction of a motorway the study finds that while connectivity does not break interlinkages completely it does significantly reduce their exploitative nature

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

monopolizing violence and consolidating power governments in weak states often face an armed opposition and have to decide whether to try to accommodate and contain that adversary or to try to consolidate power and monopolize violence by disarming it when and why do governments choose to consolidate power and monopolize violence how fast do they try to consolidate power when does this lead to costly fighting rather than to efforts to eliminate the opposition by buying it off we study an infinite horizon model in which the government in each period decides how much to offer the opposition and the rate at which it tries to consolidate its power the opposition can accept the offer and thereby acquiesce to the government s efforts to consolidate or it can fight in an attempt to disrupt those efforts in equilibrium the government always tries to monopolize violence when it has coercive power against the opposition where roughly coercive power is the ability to weaken the opposition by lowering its payoff to fighting whether the government consolidates peacefully or through costly fighting depends on the size of any contingent spoils which are benefits that begin to accrue from an increase in economic activity resulting from the monopolization of violence and the higher level of security that comes with it when contingent spoils are small the government buys the opposition off and eliminates it as fast as is peacefully possible when contingent spoils are large the government tries to monopolize violence by defeating the opposition militarily jel codes d02 d74 h1 copyright 2013 oxford university press

statistical inference of progressivity dominance an application to health care financing distributions this paper employs a distribution free statistical test suitable for comparisons based on dependent samples to analyse changes in health care financing distributions on finnish data in distinction to the more general summary index approach used in most studies of progressivity measurement the difference between the lorenz curve of income inequality and the concentration curves of various taxes and payments is used to evaluate progressivity dominance and changes in progressivity sample weights are applied to account for the effect of sampling design and non response the analysis demonstrates that the dominance approach can be successfully applied to various types of distributional problems besides comparisons concerning differences in income distributions as an empirical application the paper presents estimation results for the progressivity of various health care financing sources using data from the 1987 and 1996 finnish health care surveys

performance standards and incentive pay in agency contracts when the presence of limited liability restricts a principal from imposing monetary fines on an agent in case of poor performance the principal might use other kinds of punishment threats to deter the agent from shirking we show that under the optimal contract in this case the principal sets a performance standard and punishes the agent if the standard is not met but rewards the agent on a profit sharing basis if the standard is significantly exceeded the optimal choice of performance standards for such contracts is discussed it is shown that punishment threats although inefficient often help the principal to discipline the agent jel classification d82

credit layering in informal financial markets abstract informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers in this paper we examine the conditions under which such an arrangement is preferred by two informal lenders a landlord and a merchant who compete in loan provision to tenant farmers differentiated by wealth we show that credit layering is preferred only when tenants are sufficiently poor in this case the trader lends to tenant farmers via a contract with their landlord otherwise only the trader lends as a consequence a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering this pattern is shown to be supported empirically

landownership concentration and the expansion of education we study the relationship between large landownership concentration and the expansion of mass education in nineteenth century prussia cross sectional estimates show a negative association between landownership concentration and enrollment rates fixed effects panel estimates indicate that regions with an initially stronger landownership concentration exhibit increasing enrollment rates this relationship is not driven by differences in the supply of schooling we argue that the implementation of agricultural reforms including the stepwise abolition of serfdom is an important driver of the change in enrollment the results are consistent with the interpretation that emancipation from labor coercion increased the private demand for education

lorenz dominance and welfare changes in the u s distribution of income 1967 1986 this paper examines income inequality in the untied states over the period 1967 86 using recently developed tests for differences in lorenz curves the authors are able to rank eighteen of nineteen annual comparisons in contrast standard techniques are able to rank only twelve these results suggest that the lorenz dominance principle is more empirically relevant than previously thought the tests reveal a sharp rise in u s inequality between 1978 and 1982 as well as a shift toward greater inequality over the entire period the authors also examine changes in economic welfare using the joint mean lorenz dominance principle copyright 1991 by mit press

coercive contract enforcement law and the labor market in 19th century industrial britain british master and servant law made employee contract breach a criminal offense until 1875 we develop a contracting model generating equilibrium contract breach and prosecutions then exploit exogenous changes in output prices to examine the effects of labor demand shocks on prosecutions positive shocks in the textile iron and coal industries increased prosecutions following the abolition of criminal sanctions wages differentially rose in counties that had experienced more prosecutions and wages responded more to labor demand shocks coercive contract enforcement was applied in industrial britain restricted mobility allowed workers to commit to risk sharing contracts with lower but less volatile wages

statistical inference for the measurement of the incidence of taxes and transfers we establish the asymptotic sampling distribution of general functions of quantile based estimators computed from samples that are not necessarily independent the results provide the statistical framework within which to assess the progressivity of taxes and benefits their horizontal inequity and the change in the inequality of income which they cause by the same token these findings characterise the sampling distribution of a number of popular indices of progressivity horizontal inequity and redistribution they can also be used to assess welfare and inequality changes using panel data and to assess poverty when it depends on estimated population quantiles we illustrate these results using micro data on the incidence of taxes and benefits in canada

when the levee breaks black migration and economic development in the american south abstract in the american south postbellum economic development may have been restricted in part by white landowners access to low wage black labor this paper examines the impact of the great mississippi flood of 1927 on black out migration and subsequent agricultural development flooded counties experienced an immediate and persistent out migration of black population over time landowners in flooded counties modernized agricultural production and increased its capital intensity relative to landowners in nearby similar non flooded counties landowners resisted black out migration however benefiting from the status quo system of labor intensive agricultural production jel j15 j43 n32 n52 n92 q54 r23

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

why capital hires labor a bargaining perspective organizational forms often serve as vehicles for the appropriation of quasi rent capitalist firms typically emerge when production requires noncontractible investments in specific physical assets because worker control would divert quasi rents away from ass et owners ex post conversely labor managed firms tend to emerge in niches requiring specialized human capital but general purpose physi cal assets a key result is that capitalist firms can persist in competitive markets even when labor managed firms would yield a larg er total surplus copyright 1993 by american economic association

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

contractual signaling in a market environment abstract we consider a game of signaling where the informed sender proposes a contract which can only be accepted or rejected by the receiver while most of the literature considers a bilaterally monopolistic setting we embed the game in a market environment where a sender may switch to another receiver in case of rejection we analyze how this structural extension can be employed to restrict the set of stationary equilibrium allocations journal of economic literature classification number c78 d82

endogenous availability in search equilibrium bargaining power by shopping at two firms and then bringing those firms into competition with one another knowing this firms adjust quoted prices to keep customers from exercising this option we compare equilibrium prices and availability firm profits and customer welfare under duopoly with those that would obtain under monopoly wefind that for low levels of exogenous customer search costs duopolists provide lower prices and lower availability while for high customer search costs duopolists provide the same price but greater availability than would a monopolist

a stochastic dominance analysis of growth recessions and the u s income distribution 1967 1986 the adverse effects of recessions and the benefits of growth are widely researched and generally well understood but the effects of recessions and low growth on the distribution of income have not been so extensively researched nor are they well understood this paper applies stochastic dominance a relatively new approach to studying income distributions to investigate the effects of recent growth and recessions on the u s income distribution rather than looking at a single summary statistic such as per capita gnp across time we consider the entire income distribution and measure economic performance by looking at a number of points within the distribution our objective is twofold first we use recent developments in income distribution theory and measurement to present inference based measures of the u s income distributions across time second we address the question of how recent growth and recessions have impacted on the well being of specific income groups and classes

marginal conditional stochastic dominance this paper introduces the concept of marginal conditional stochastic dominance mcsd which states the conditions under which all risk averse individuals when presented with a given portfolio prefer to increase the share of one risky asset over that of another mcsd rules also answer the question of whether all risk averse individuals include a new asset in their portfolio when assets returns are correlated mcsd criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio an empirical application of mcsd is provided using stocks traded on the new york stock exchange mcsd rules are used to show that in the long run one cannot assert that the market portfolio is inefficient

demographic transition family structure and income inequality we treat each age specific income earning member of the family as an income source and use the source specific gini decomposition approach as well as the lorenz comparison approach to study the

search bargaining and signalling in the market for legal services over the last eight centuries lawyers in common law countries have generally been precluded from buying their clients cases recently a number of economists and lawyers have argued that sale should be allowed so as to eliminate moral hazard particularly when contingent fees are used this argument is based on full information reasoning however if the lawyer has private information about the case value then compensation demands potentially signal this value when the client can search over lawyers we provide a formal model and a family of computational examples that show that allowing possibly partial purchase can reduce expected social efficiency

the political economy of indirect control this paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority we develop a dynamic principal agent model in which a principal a government delegates the prevention of a disturbance such as riots protests terrorism crime or tax evasion to an agent who has an advantage in accomplishing this task our setting is a standard dynamic principal agent model with two additional features first the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players second the principal suffers from limited commitment using recursive methods we derive a fully analytical characterization of the likelihood intensity and duration of intervention the first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium this is because they serve as a punishment to induce the agent into desired behavior the second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal s inability to commit finally we derive sharp predictions regarding the impact of various factors on likelihood intensity and duration of intervention we discuss these results in the context of some historical episodes

the effect of third party funding of plaintiffs on settlement a significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement when the plaintiff has private information about damages we find that the optimal plaintiff funder loan induces all plaintiff types to make the same demand resulting in full settlement implementation may entail a very high repayment amount plaintiffs attorneys with contingent fee compensation benefit from such financing as it eliminates trial costs when the defendant has private information about his likelihood of being found liable we find that the likelihood of settlement is unaffected in both settings the defendant s incentive for care taking is unaffected jel d82 k41 l84 since the late twentieth century the financing of lawsuits wherein third parties provide direct financial support to tort plaintiffs has developed into an emerging industry in the united states and worldwide 1 with a potentially substantial effect on the efficiency of the legal system such financial support takes the form of a nonrecourse loan that is the litigation funder advances payment to the plaintiff and repayment occurs only if the plaintiff is successful either in settlement or at trial and then only up to the plaintiff s recovery net of attorney fees which are generally a percentage of the plaintiff s received transfer from the defendant focusing on the nonrecourse aspect some courts and commentators have bemoaned such loans arguing that they will necessarily lead to increased failure of settlement negotiations and interference in the attorney client relationship 2 in this paper we use a signaling model to analyze the effect of such third party loans to plaintiffs on settlement bargaining when a plaintiff has private information 1 for discussions of litigation funding outside the united states see hodges vogenauer and tulibacka 2010 chen 2012 and abrams and chen 2013