'Necessary Costs' and the Incentive of the English Rule
The English rule of court cost allocation only allows costs that are deemed to be 'necessary' or 'proper' for the attainment of justice to be shifted from the winner to the loser at trial. We model litigants who optimize with respect to the level of legal inuts they use, and compare the incentive effects of such a rule against the standard representation of the English rule, wherein all costs are assumed to be transferred from the winner to the loser. We show that the incentive to file suit, to settle before going to trial, and to spend resources on litigation if settlement is not reached can be higher or lower for risk neutral litigants than is predicted by the stylized English rule. Lastely, we show that litigation expenditure is affected by the degree of uncertainty (risk-neutral) litigants face regarding the level of necessary costs. Thus, under the English rule, courts affect litigants' incentives through the precision with which they define necessary costs.
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