Contingent fee caps, screening, and the quality of legal services
In theory, contingent fees can reduce the effects of informational asymmetries by allowing clients to screen low-quality attorneys who obtain smaller awards in expectation. We experimentally examine whether clients possess the sophistication necessary to design screening contracts and how contingent fee caps affect a client's ability to screen. When contingent fees are unrestricted, we find that most subjects are able to design contracts that screen low-quality attorneys, resulting in an increase in the quality of legal services. However, we find that contingent fee caps decrease the frequency of screening even if the cap is non-binding. Caps on contingent fees also reduce clients’ ability to extract surplus, allowing attorneys to earn greater profits.
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