Optimality of Attorney’s Fee-Shifting Rules: An Empirical Investigation

Shifting rules of attorney’s fees directly affect the essential aspects of litigation such as incentives to file different lawsuits. We estimate the actual and optimal shifting-ratios of attorney’s fees by utilizing a very unique court dataset from South Korea. First, we found that the actual value of the shifting-ratio is some distance from either 0 (i.e., the American Rule) or 1 (i.e., the British Rule). We observe that this would hold for most countries including even the U.S. and the U.K. worldwide. The optimality is then derived through modeling a tradeoff of deterring the ‘frivolous suit’vs. encouraging the ‘meritorious suit’with the shifting ratios. We reach important conclusions, for example, that the optimal ratio should be lowered in countries with a stronger constitutional belief in the trial right, while it should be raised as the legal services market becomes more competitive.