Auction-Theoretic Approach to Modeling Legal Systems : An Experimental Analysis

In this paper, we report experimental results providing a test of the auction theoretic approach to modeling legal systems (see Baye, Kovenock and de Vries, 2005 and Klemperer, 2003). Consistent with the theory, experimental evidence indicates that systems in which winners pay a low fraction of their legal expenditure at trial such as the British and the Continental systems generate higher average total legal costs for cases already at trial. Giving participants the opportunity to opt out of a costly legal dispute, we observe that the British and Continental systems provide lower incentives to litigate. However, contrary to the model's predictions, they generate higher average total legal costs in this case as well. For example, the British system generates fewer trials than the American system, but results in the highest average total legal costs overall. Other legal systems, such as the Quayle and Continental systems, yield intermediate results