A Legal, Empirical, and Economic Analysis
New Horizons in Law and Economics series
Edited by Mark Tuil and Louis Visscher
Chapter 2: A Law and Economics Approach to Cost Shifting, Fee Arrangements and Legal Expense Insurance
Louis Visscher and Tom Schepens INTRODUCTION 1. In this chapter, we will provide an overview of the economic literature regarding cost shifting, fee arrangements and legal expense insurance. In the economic analysis of law, legal rules are regarded as instruments which can provide actors with behavioural incentives. In essence, private law (torts, contracts, property, etc.) allocates the costs which arise out of different activities. Those costs may only be borne by the party causing them if the party initially suffering from them brings suit. Problems in financing civil litigation may effectively hinder such lawsuits, so that the behavioural incentives which the law intends to provide do not reach the party causing the harm. For example, tort law is regarded as an instrument that induces people to take care. The prospect of being held liable after negligently having caused losses may induce a potential tortfeasor to take due care, because taking due care (thereby avoiding liability) is less costly than taking too little care (and being liable). Contract law is seen as a device that enables people to increase welfare by engaging in voluntary transactions. The remedies of contract law (specific performance and damages) induce the debtor to fulfil his contractual duties when this is less costly than breaching the contract and facing the sanction. If the victim of a tort or the creditor in a contractual setting does not bring a claim against the tortfeasor or the debtor, neither the tortfeasor nor debtor would face any expected sanction. This would...
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