When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number
99-12.
Length: Date of creation: 1999 Date of revision: Publication status: Published in Journal of Law and Economics, 44(2), Part I, October 2001 Handle: RePEc:fip:feddwp:99-12
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