Differences in incentives in the American and British (and continental European) legal systems explain why Americans spend so much more on civil lawsuits, according to new research by Michael Baye, Dan Kovenock and Casper de Vries, published in the July 2005 Economic Journal.
The key difference is that under the British and continental European systems, the loser in a suit has to pay a substantial portion of the winner”s legal fees, while under the American system, each party pays their own legal fees.
The ”all pay” nature of the American system explains why the United States has been dubbed the ”litigious society”. While the American system results in lower legal expenditures on a per trial basis, the incentives to go to trial are much higher under the American system than under the British and continental European systems. The researchers show that because of this incentive effect, the British system results in the lowest possible expenditures on legal services and the American system results in the highest.
More generally, the research shows that any attempts to reform the legal system by altering the division of legal fees paid by each litigant will result in total legal outlays somewhere between those under the existing American and British systems. Americans collectively spend twice as much on civil litigation than they spend on new automobiles – and more than any other industrialised country.
As a fraction of GDP, litigation expenditures in the United States are three times greater than those in the UK; 3.3 tort suits are filed in the United States for each 1,000 inhabitants compared with only 1.2 per 1,000 in England.
”Comparative Analysis of Litigation Systems: An Auction-theoretic Approach” by Michael Baye, Dan Kovenock and Casper de Vries is published in the July 2005 issue of the Economic Journal. Michael Baye is at the Kelley School of Business, Indiana University. Dan Kovenock is at the Krannert School of Management, Purdue University. Casper de Vries is at Erasmus University Rotterdam.
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