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Clients, Lawyers, Second Opinions, and Agency

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  • Andrew F. Daughtey

    ()
    (Department of Economics and Law School, Vanderbilt University)

  • Jennifer F. Reinganum

    ()
    (Department of Economics and Law School, Vanderbilt University)

Abstract

We 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 client�s 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 case�s 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 client�s expected payoff, but it does reduce the lawyer�s 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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File URL: http://www.accessecon.com/pubs/VUECON/vu10-w09.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1009.

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Date of creation: Jun 2010
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Handle: RePEc:van:wpaper:1009

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Signaling; Agency; Search; Contingent Fee;

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References

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  1. 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, Oxford University Press, vol. 9(2), pages 349-67, October.
  2. 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, University of Chicago Press, vol. 36(2), pages 253-273, 06.
  3. 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, Wiley Blackwell, vol. 1(3), pages 455-73, Fall.
  4. Santore, Rudy & Viard, Alan D, 2001. "Legal Fee Restrictions, Moral Hazard, and Attorney Rights," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 44(2), pages 549-72, October.
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