Legal Fees, Cost-Shifting Rules and Litigation: Experimental Evidence

Abstract

In this paper, we conduct an experiment in order to explore how the legal fee arrangement (i.e. flat or contingent fees) and the trial costs allocation rule (i.e. American or English rule) may shape the efficiency of the litigation process, via their effect on the lawyer’s effort, the deterrence of frivolous lawsuits and the plaintiff’s incentives to go to court. In our experimental context, it is shown that the combination of contingent fees and English rule is the best setting in terms of effort incentives, but enhances frivolous lawsuits. This result may indicate potentially that the recent tendency observed in European countries to combine contingency and English rule would be desirable only if it is associated to mechanisms discouraging plaintiffs to sue meritless cases.