Litigation Spending and Care under the English and American Rules: Experimental Evidence

Abstract

We investigate the effects of fee-shifting in an experimental litigation game. In our setup, a defendant may cause harm to a plaintiff. The defendant can take precautions to lower the probability of harm at a personal cost. In case of harm, the parties go to court, where the winner is determined by a rent-seeking contest. We compare two fee-shifting rules: under the American rule each party bears its own litigation costs; under the English rule the loser has to reimburse the winner’s expenses. We test the hypothesis that the English rule leads to higher litigation spending but also to higher care compared to the American rule. The experimental results largely support the predictions: fee-shifting leads to higher litigation spending, which motivates higher levels of care. When the parties are offered the possibility to settle their dispute out of court, fee-shifting leads to even higher litigation spending in court, but it neither affects the settlement rate nor care.

Experiments in law and economics

“…The findings are mixed. For instance, while Coursey and Stanley (1988) and Coughlan and Plott (1998) both found that settlement rates were significantly higher under the English Rule than under the American Rule, Massenot et al (2016) observed no significant differences. Importantly, Massenot et al (2016) revealed that each rule had its own costs and benefits (e.g.…”

“…For instance, while Coursey and Stanley (1988) and Coughlan and Plott (1998) both found that settlement rates were significantly higher under the English Rule than under the American Rule, Massenot et al (2016) observed no significant differences. Importantly, Massenot et al (2016) revealed that each rule had its own costs and benefits (e.g. the American Rule was more efficient at the trial stage, whereas the English Rule performed better in incentivising ex-ante precautionary behaviours).…”

“…After Coursey and Stanley (1988) and Coughlan and Plott (1998), only a few other laboratory experiments have analysed the effects of fee-shifting rules on individuals' litigation behaviour Park, 2000, 2002;Inglis et al, 2005;Massenot et al, 2016). The findings are mixed.…”

“…The mixed results might be driven by the different experimental designs implemented. Massenot et al (2016) framed the experiment in a medical malpractice context (see Figure 3.4 for sample instructions), whereas Coursey and Stanley (1988) and Coughlan and Plott (1998) used a neutral, non-framed design. Differently from Coursey and Stanley (1988) and Coughlan and Plott (1998), Massenot et al (2016) considered a three-stage game: the first stage involved a doctor's care decisions to avoid a medical error, hence, a monetary loss to a patient; the second stage involved settlement bargaining; the third stage was the (eventual) litigation game (in case of settlement failure).…”

On the role of emotions in experimental litigation contests

“…Experimental evidence supporting that emotions such as anger are very relevant for understanding retaliatory behavior such as punishment abounds (e.g., Bolle et al 2014, Bosman and van Winden 2002, Galeotti 2015, Reuben and van Winden 2008, Xiao and Houser 2005, van Winden 2007. Our paper is also related to a small line of literature using experimental economics to study decision-making in litigation, which has examined the impacts of whether the judicial system is adversarial or inquisitorial (Block and Parker 2004), of litigants delegating decisions to attorneys (Croson and Mnookin 1997) and how this delegation is governed contractually (McKee et al 2007) While Coughlan and Plott (1997) and Massenot et al (2017) also analyze experimentally decision-making in a litigation contest, neither of them considers the impact of emotions thereon.…”