I have read and heard anecdotal evidence that litigation in the United States is countercyclical.  Usually this is cynically explained by saying that when times are tough everybody is looking to make an extra buck.  But of course everybody is looking to make an extra buck when times are good too.

All of business activity relies on relationships that are partially supported by contracts and partially supported by trust.  Trust fills in the gaps of incomplete contracts.  When the contract is not followed to the letter, your interest in maintaining a healthy relationship smooths things over.

Bad times raise uncertainty about whether there are any gains left from this relationship in the future.  This undermines trust and the result is that the courts are called in to fill the gaps.

There are a couple of natural ways to test this theory.  First the countercyclical nature of litigation should vary across sectors.  Thick markets with relatively anonymous actors should see less impact of economic downturns on the rate of litigation.  Also, the effect outlined above is based on the assumption that contracts are written in good times and litigated in bad times.  If the downturn is expected to last, then new contracts should tend to be more complete, taking into account the increased appetite for litigation.  The result should be less litigation in longer downturns than in shorter ones.

I thank Rosemary for the conversation.

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