Both the current system and no-win, no-fee arrangements are so biased in favour of the claimants that they encourage people to make claims effectively risk-free, the Adam Smith Institute (ASI) said.
The ASI called for a fundamental review of the funding of access to justice, saying civil legal aid provides "dubious value for money" and should be abolished in most cases.
A new system within the no-win no-fee framework should be devised instead, it said, with a cap on the level of costs recoverable from unsuccessful defendants.
ASI director Tom Clougherty said: "The reforms we've proposed will save the taxpayer money while also ensuring a system of funding access to justice that is simple, robust and fair. It's a win-win that the Government should be tempted to go for."