Optional Fee-Shifting

We study settlement bargaining under three alternative fee-shifting rules: the American Rule, the English Rule, and an optional feeshifting regime in which the defendant chooses whether the case will proceed under the American or the English Rule. The defendant knows whether his conduct gives rise to liability while the plaintiff only has a noisy signal. This two-sided asymmetric information creates scope for strategic misrepresentation: defendants who face liability may try to pass as if they do not, while plaintiffs with weak evidence may act as if they have a strong case. When litigation costs are similar for both parties, optional fee-shifting reduces litigation rates more effectively than either the American or the English Rule alone.