Question: 1. Assume that both parties to a legal dispute are averse to the risk of losing at trial. Would risk-averse parties be more inclined to settle out of court under a rule of "each pays his own" or "loser pays all"?
2. Suppose "loser pays all" is more efficient than "each pays his own." In a jurisdiction that follows "each pays his own," the Coase Theorem would predict that the two parties would sign a contract requiring the loser to reimburse the winner, thus adopting the more efficient rule by private agreement. Give some economic reasons why this does not occur in fact.