Abstract
Expenditure on legal services has been rising for much of the last two decades and has attracted considerable policy attention in the UK. We argue that an important reason for this increase lies within the introduction of 'no win no fee' schemes in 1995 and a subsequent amendment which allowed claimants to shift additional costs (introduced by the 'no win no fee' schemes) onto losing defendants in 2000. In this paper, we evaluate the effect of the second of these reforms - that relating to the shifting of costs. We describe how this may have exacerbated the negative externality often associated with cost-shifting, which arises from losing litigants being held liable to pay their successful opponents' costs. We use a dataset consisting of (daily) employers' liability claims to undertake a regression discontinuity design (RDD) in order to see whether claimants' litigation costs increased following the introduction of the cost-shifting amendment. We find that costs increased by approximately 25% after the new policy was introduced, consistent with theoretical predictions. As well as providing a rare test of underlying theory (and the first with UK data), our analysis also points towards the need for more careful evaluation of policy in order to avoid unintended consequences of reform.