Abstract

One of the principal results in the economic theory of litigation is that the English rule of fee allocation (in which the loser pays the winner's litigation costs) is better at discouraging suits by low-probability-of-prevailing plaintiffs than the American rule (in which each side bears its own costs). This result has been demonstrated under the assumption that all suits that are filed go to trial. Using a standard asymmetric- information model of litigation, we show that when the settlement process is taken into account the English rule results in more low-probability-of-prevailing plaintiffs going to trial than the American rule. In this sense, the English rule encourages low-probability plaintiffs more than the American rule.

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