Measuring the Demand for Litigation: Is the English Rule Really Cheaper?

Abstract

ed from the issue of the number of cases in the legal systemi, instead explicitly considering the determinants of expenditure per case. In brief, three major conclusions follow from the analysis. First, those who favor the English rule of litigation finance on the grounds that it would lower the costs of litigation are prolalylv mistaken. While it is conceivalle that the English rule wouldl lower the total number of cases brought to trial, it would likely increase the average expenditure per case. This is because the English rule both raises the effective stakes of the lawsuit, thus raising the marginal value of expenditure, an(ld provides a probabilistic subsidy on the margini, thus lowering the marginal cost of expenditure. The simulations above suggest that for plausible parameter values, a switch from the pure American rule to the pure Eniglish rule could result in an increase in expenditure of over 100 percent in the typical case. Even if the number of cases were to fall by as much as 30 percent, total expenditure could still rise by more than 50 percent under the English rule. This content downloaded from 157.55.39.133 on Fri, 17 Jun 2016 06:56:29 UTC All use subject to http://about.jstor.org/terms 172 / JOURNAL OF LAW, ECONOMICS, AND ORGANIZATION 111:2, 1987 Second, variations in expenditure per case seem to be of much greater importance than has been suggested by the emphasis of the theoretical literature on litigation, which has largely focused on the incentives to bring suit and to settle. The results here indicate that effects on the amount of expenditure per case can dominate effects on the number of cases in the system. For example, a switch to the English rule of litigation finance which reduces the number of cases in the system by one-half could still result in a larger total level of expenditure. The implication for policy purposes is that those concerned about the high costs of litigation should devote relatively more attention to lowering the cost of processing the typical