An Economic Analysis of the American and the Continental Rule for Allocating Legal Costs

A well-known conclusion from the standard model of litigation is that a transition from the American to the Continental rule for the allocation of legal costs will lead to an increase in the number of trials. The standard model, however, neglects the fact that the rule for allocating legal costs may also influence whether or not a potential injurer engages in a harmful activity. When this choice is endogenized, the conclusion derived from the standard model does not appear to be generally valid. A transition from the American to the Continental rule may lead to a decrease in the number of trials. Furthermore, the transition may result in an improvement in efficiency.