ABSTRACT
This chapter presents an economic theory of litigation, explaining the circumstances in which rational litigants choose to become embroiled in, and to settle, judicial proceedings. This theory reveals, as indicated, that the litigation process's primary economic purpose is to induce a Coasian bargain. By identifying the factors that frustrate settlement, one can begin to contemplate ways in which to improve the efficiency of the litigation process. In analysing litigation using neoclassical economics theory, this part considers two different rules governing the outcome of legal disputes. The first is what many refer to as 'the American rule', which provides that each side to a controversy must bear its own legal costs, regardless of who wins. The 'English rule', by contrast, provides that the loser pays. The chapter proceeds under the American rule, which is analytically more straightforward. It explores the different results that ensue under the English rule, and addresses the possible bases for preferring one rule over the other.
