Rent-seeking and Litigation: the Hidden Virtues of the Loser-pays Rule

Abstract: In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (e.g., the American rule and English rule) affect parties' litigation expenditures and their decisions to litigate. Contrary to the prevailing wisdom, we discover some interrelated advantages of the English rule over the American rule, including the reduction of litigation rates and the possible reduction of expected litigation expenditures. Our results unveil a hidden virtue of the English rule, showing that an increase in fee-shifting may lead to a desirable sorting of socially valuable litigation.