Clients, Lawyers, Second Opinions, and Agency
AbstractWe model the game between an informed seller (a lawyer) and an uninformed buyer (a potential client) over the choice of compensation for the lawyer to take a case to trial, when there is post-contracting investment by the lawyer (effort at trial) that involves moral hazard. Clients incur a one-time search cost to contact a lawyer, which parametrically influences the monopoly power of the lawyer when he makes a demand of the client for compensation for his service. The client uses the demand to decide whether to contract with the lawyer or to visit a second lawyer so as to seek a second opinion, which incurs a second search cost. Seeking a second opinion shifts the bargaining power to the client by causing the lawyers to bid for the right to represent the client. We allow for endogenously-determined contingent fees alone (that is, the lawyer covers all costs and obtains a percentage of any amount won at trial) or endogenously-determined contingent fees and transfers; in this latter analysis, lawyers could buy the clientï¿½s case. Under asymmetric information with only a contingent fee, in equilibrium the first lawyer visited demands a higher contingent fee for lower-valued cases, signaling the caseï¿½s value to the client. If a transfer is also allowed, then in equilibrium the higher contingent fee (and transfer from the lawyer to the client) is obtained by the more valuable case, with only the highest-value case resulting in the lawyer buying the entire case (100% contingent fee with a transfer); again, in equilibrium, the value of the case is signaled. In both settings the client uses an equilibrium strategy that involves seeking a second opinion a fraction of the time, which induces separation. In equilibrium the presence of asymmetric information does not affect the clientï¿½s expected payoff, but it does reduce the lawyerï¿½s expected payoff and it does increase moral-hazard-induced inefficiency on the part of the lawyer in the post-contracting investment.
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Bibliographic InfoPaper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1009.
Date of creation: Jun 2010
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Signaling; Agency; Search; Contingent Fee;
Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-20 (All new papers)
- NEP-CTA-2010-11-20 (Contract Theory & Applications)
- NEP-LAW-2010-11-20 (Law & Economics)
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.:
- 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.
- Santore, Rudy & Viard, Alan D, 2001. "Legal Fee Restrictions, Moral Hazard, and Attorney Rights," Journal of Law and Economics, University of Chicago Press, vol. 44(2), pages 549-72, October.
- Daughety, Andrew F, 1992. "A Model of Search and Shopping by Homogeneous Customers without Price Precommitment by Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 455-73, Fall.
- Michael McKee & Rudy Santore & Joel Shelton, 2007. "Contingent Fees, Moral Hazard, and Attorney Rents: A Laboratory Experiment," The Journal of Legal Studies, University of Chicago Press, vol. 36(2), pages 253-273, 06.
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