The NYT’s Room for Debate Blog on Investing/Lending to Finance Lawsuits

The often very interesting Room for Debate blog at the New York Times has a new discussion on the question of whether it is good policy to allow outsiders to invest in someone else’s lawsuit.  Here’s the opening to how the question is framed:

With litigation costs rising, many plaintiffs and their lawyers do not have the money to hire expensive experts or pay for years of trial preparation. To fill this need,specialized litigation lenders are stepping in to bankroll lawsuits — often providing millions of dollars at very high interest rates because conventional banks typically do not offer such loans.

Richard Epstein, Anthony Sebok, Paul Rubin, Laurel Terry, and Susan Lorde Martin take part.

My overall take is that this creates yet another system of side bet financing, in which there are the typical problems of not having an insurable interest.  The counterargument is that the liquidity provided allows for more socially efficient litigation to take place; the response is that a liquid but also disconnected system of derivatives creates downstream bad incentives.  One does not have to reach to the financial crisis to find examples; the tobacco settlements – pathbreaking achievements in their way in structured finance – solve some problems but create some new ones.