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

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.