Fee Shifting and Incentives to Comply with the Law

Law and economics is a top-heavy discipline, in the sense that it is largely theoretical. Empirical tests of its claims have been carried out only recently, and a great deal remains to be done. The larger part of the recent wave of empirical law and economics research, however, examines the litigation process. This research has focused on the frequencies with which lawsuits are brought and with which they are settled.

Surprisingly, empirical researchers have given little attention to the theoretical literature that makes predictions concerning incentives to comply with legal rules and the optimality of compliance equilibria. This lack of attention is disappointing because compliance theory has a greater claim to being "core," or central, to the law and economics literature than does litigation theory. The reason for the uneven fit between empirical and theoretical re- search agendas is clear: it is difficult to observe the effects of legal standards on ordinary behavior outside of the courtroom. How, for example, should one go about determining the effect of the negligence rule on the caretaking behavior of drivers?

Nature provides few experiments and the cost of creating the required experiments is prohibitive. In the area of fee shifting, for example, courts and commentators have long justified deviations from the American fee shifting rule by referring to effects on compliance incentives.4 Not a shred of empirical evidence on the compliance effects of alternative fee shifting rules exists, however, and it is unlikely that it ever will, given the cost of the required experiments.