A theory of legal presumptions

This article analyzes how legal presumptions can mediate between costly lit igation and ex ante incentives. We augment a moral hazard model with a redi stributional litigation game in which a presumption parameterizes how a cou rt "weighs" evidence offered by the opposing sides. Strong prodefendant pre sumptions foreclose lawsuits altogether, but also engender shirking. Strong proplaintiff presumptions have the opposite effects. Moderate presumptions give rise to equilibria in which both shirking and suit occur probabilisti cally. The socially optimal presumption trades off agency costs against lit igation costs, and could be either strong or moderate. depending on the soc ial importance of effort, the costs of filing suit, and the comparative adv antage that diligent agents have over their shirking counterparts in mounti ng a defense. We posit three applications of our model: the litigation rate effects of the 1995 Private Securities Litigation Reform Act, the business judgment rule in corporations law, and fiduciary duties in financially dis tressed firms.