Third-Party Litigation Financing Under a Veil of Secrecy: The Equilibrium Consequences of Disclosure Requirements

Abstract Third-party litigation finance is an increasingly popular practice in commercial litigation. Despite calls for mandated disclosure, litigation funders are mostly anonymous to defendants, judges, and juries. We first present an equilibrium model of litigation, with endogenous settlement and trial, where plaintiff financing is private information. Defendants use the plaintiff’s response to settlement offers to update their priors on a plaintiff’s level of financing. We then contrast this equilibrium with one in which disclosure is mandated. Despite the common intuition that “plaintiffs prefer secrecy” and “defendants prefer disclosure,” theory suggests that such preferences are more complex. The model is able to isolate when and why such preferences over disclosure regimes may vary, with some plaintiffs actually preferring disclosure and some defendants actually preferring secrecy.