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Optimal Contingent Fees in a World of Settlement

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Author Info
Hay, Bruce L
Abstract

This article examines the design of contingent fees for plaintiffs' lawyers in a legal system that gives parties the choice between going to trial and settling out of court. Using a simple principal-agent model with attorney moral hazard, the article shows that the client generally benefits from a bifurcated fee structure in which the attorney gets a large fraction of the recovery in the event of trial but a small fraction in the event of settlement; this structure maximizes both the size of the recovery and the client's distributive share of it. The article also examines the limits on the use of this fee structure that are imposed by two aspects of the settlement bargaining process: (1) the allocation of settlement authority between lawyer and client, and (2) the relative bargaining power of plaintiff and defendant. Copyright 1997 by the University of Chicago.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Legal Studies.

Volume (Year): 26 (1997)
Issue (Month): 1 (January)
Pages: 259-78
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Handle: RePEc:ucp:jlstud:v:26:y:1997:i:1:p:259-78

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  1. repec:bep:dewple:2003-1-1056 is not listed on IDEAS
  2. Winand Emons & Nuno Garoupa, 2004. "The Economics of US-style Contingent Fees and UK-style Conditional Fees," Diskussionsschriften dp0407, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
    Other versions:
  3. Rudy Santore & Alan D. Viard, 1999. "Legal fee restrictions, moral hazard, and attorney profits," Working Papers 99-12, Federal Reserve Bank of Dallas. [Downloadable!]
  4. Nuno Garoupa & Fernando Gómez, 2002. "Cashing by the Hour: Why Large Law Firms Prefer Hourly Fees Over Contingent Fees," Economics Working Papers 639, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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