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Aligning the Interests of Lawyers and Clients

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Author Info
A. Mitchell Polinsky (Stanford University and National Bureau of Economic Research)
Daniel Rubinfeld (University of California, Berkeley)

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Abstract

The potential conflict of interest between lawyers and clients is well known. If a lawyer is paid for his time regardless of the outcome of the case,the lawyer may wish to bring the case even when it is not in the best interest of the client, may spend more hours working on the case than the client would want, and may reject a settlement when the client would be better off if it were accepted. Alternatively, if the lawyer is compensated according to the conventional contingent fee arrangement under which he is paid a fraction of any trial award or settlement but bears all of the cost of litigation the lawyer may have an insufficient incentive to bring the case, may spend too little time working on it if it is brought, and may encourage a settlement when the client would be better off going to trial. In this article we propose a method of compensating lawyers that overcomes the conflict of interest between the lawyer and the client. Our system is a variation of the conventional contingent fee system, but, in contrast to that system, we would have the lawyer bear only a fraction of the cost of litigation the same fraction that the lawyer obtains of the award or settlement. We demonstrate that when the fraction of the cost that the lawyer bears equals the fraction of the award or settlement that he obtains, he will have an incentive to do exactly what a knowledgeable client would want him to do with respect to accepting the case, spending time on the case, and settling the case. Under our modified contingent fee system, a third party would compensate the lawyer for a certain fraction of his costs, in return for which the lawyer would pay that party an up-front fee. In this way, the client would not bear any costs, even if the case is lost, just as under the conventional contingent fee system.

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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number 1023.

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Date of creation: 01 Aug 2001
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Handle: RePEc:cdl:oplwec:1023

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Daniel F. Rubinfeld & Suzanne Scotchmer, 1993. "Contingent Fees for Attorneys: An Economic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 343-356, Autumn. [Downloadable!] (restricted)
  2. Gravelle, Hugh & Waterson, Michael, 1993. "No Win, No Fee: Some Economics of Contingent Legal Fees," Economic Journal, Royal Economic Society, vol. 103(420), pages 1205-20, September. [Downloadable!] (restricted)
  3. A. Mitchell Polinsky & Daniel Rubinfeld, 2001. "A Note on Settlements under the Contingent Fee Method of Compensating Lawyers," Berkeley Olin Program in Law & Economics, Working Paper Series 1020, Berkeley Olin Program in Law & Economics. [Downloadable!]
    Other versions:
  4. Shavell, Steven, 1997. "The Fundamental Divergence between the Private and the Social Motive to Use the Legal System," Journal of Legal Studies, University of Chicago Press, vol. 26(2), pages 575-612, June.
  5. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn. [Downloadable!] (restricted)
  6. Dana, James D, Jr & Spier, Kathryn E, 1993. "Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 349-67, October.
  7. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March. [Downloadable!] (restricted)
  8. Patricia Munch Danzon, 1983. "Contingent Fees for Personal Injury Litigation," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 213-224, Spring. [Downloadable!] (restricted)
  9. Hay, Bruce L, 1996. "Contingent Fees and Agency Costs," Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 503-33, June.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Liqun Liu & Andrew Rettenmaier & Thomas Saving, 2009. "Conditional payments and self-protection," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 159-172, April. [Downloadable!] (restricted)
  2. Roland Kirstein & Neil Rickman, . "Third Party Contingency contracts in settlement and litigation," German Working Papers in Law and Economics 2002-1-1038, Berkeley Electronic Press. [Downloadable!]
    Other versions:
  3. A. Mitchell Polinsky & Daniel Rubinfeld, 2001. "A Note on Settlements under the Contingent Fee Method of Compensating Lawyers," Berkeley Olin Program in Law & Economics, Working Paper Series 1020, Berkeley Olin Program in Law & Economics. [Downloadable!]
    Other versions:
  4. 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:
  5. Roland Kirstein, . "Anti-Teilen in Teams," German Working Papers in Law and Economics 2005-1-1127, Berkeley Electronic Press. [Downloadable!]
  6. Winand Emons, 2004. "Conditional versus Contingent Fees," Diskussionsschriften dp0409, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
    Other versions:
  7. 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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