Experiments on the Effects of Fee Shifting and Discovery on the Efficient Settlement of Tort Claims

In this paper, we apply the methods of experimental economics pioneered by 2002 Nobel Prize winner Vernon Smith to the study of the effects of several proposed tort reform options. Specifically, we study the effects of fee shifting and discovery on the efficient use of the courts. Because it is difficult, if not impossible, to measure efficiency in the real world, we believe that controlled experiments offer valuable contributions to the debate on tort reform. The experiments presented in this paper point to the following main conclusions: First, a symmetric cost-shifting rule, as embodied in Section 998, California Code of Civil Procedure (similar to proposed changes to Rule 68 of the Federal Rule of Civil Procedure), produces no difference in pre-trial settlement rates when compared to an environment without cost-shifting. Second, the inclusion of attorneys’ fees as recoverable costs under Section 998 improves settlement rates. Third, liberal discovery rules, which improve information symmetry, cause an improvement in pre-trial settlement rates. Finally, when efficiency is measured relative to the final bargaining positions in pre-trial negotiations, we find a much greater inefficiency in the use of the courts when attorneys’ fee are included over when they are not. This last conclusion suggests that policies directed towards tort reform are in fact ignoring an important feature of tort settlements, i.e., the hardening of positions as parties attempt to reduce their disagreement over a reasonable settlement