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Moral hazard and agency relationship in sequential litigation

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  • At, Christian
  • Gabuthy, Yannick

Abstract

The aim of this paper is to determine the optimal fee contract between a plaintiff and his lawyer in a trial process where liability and damages are treated sequentially: the court determines liability at the first stage and chooses damages at the second one. The plaintiff–lawyer relationship is embedded in a dynamic principal-agent setup where the lawyer's effort is unobservable by her client. It is shown that such a sequential process induces an interesting spillover effect for the plaintiff: the prospect of payment at the second period acts as carrot for the first period by inciting the lawyer to make effort in the liability stage in order to enjoy the reward in case of winning when damages are litigated. This effect implies a particular contractual design where the lawyer gets no transfer from the plaintiff at the first period.

Suggested Citation

  • At, Christian & Gabuthy, Yannick, 2015. "Moral hazard and agency relationship in sequential litigation," International Review of Law and Economics, Elsevier, vol. 41(C), pages 86-90.
  • Handle: RePEc:eee:irlaec:v:41:y:2015:i:c:p:86-90
    DOI: 10.1016/j.irle.2014.11.002
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    References listed on IDEAS

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    Cited by:

    1. repec:bpj:bejeap:v:19:y:2019:i:2:p:11:n:12 is not listed on IDEAS
    2. At Christian & Friehe Tim & Gabuthy Yannick, 2019. "On Lawyer Compensation When Appeals Are Possible," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(2), pages 1-11, April.
    3. Yannick Gabuthy & Pierre-Henri Morand, 2019. "Lawyer Fee Arrangements and Litigation Outcomes: An Auction-Theoretic Perspective," Working Papers of BETA 2019-03, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item

    Keywords

    Sequential trials; Moral hazard;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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