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Contingent Fees, Moral Hazard, and Attorney Rents: A Laboratory Experiment

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  • Michael McKee
  • Rudy Santore
  • Joel Shelton

Abstract

When attorney effort is not verifiable, previous theoretical work has found that a competitive legal services market may yield an equilibrium contingent fee that is strictly greater than the zero-profit contingent fee. However, these results require fairly sophisticated consumers who recognize that lower contingent fees do not induce sufficient attorney effort. This paper reports on tests of these predictions in an experimental setting.

Suggested Citation

  • 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, June.
    • Handle: RePEc:ucp:jlstud:v:36:y:2007:p:253-273
    DOI: 10.1086/511897
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    References listed on IDEAS

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    1. Polinsky, A. Mitchell & Rubinfeld, Daniel L., 2002. "A note on settlements under the contingent fee method of compensating lawyers," International Review of Law and Economics, Elsevier, vol. 22(2), pages 217-225, August.
    2. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    3. Dana, James D, Jr & Spier, Kathryn E, 1993. "Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 349-367, October.
    4. Hay, Bruce L, 1996. "Contingent Fees and Agency Costs," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 503-533, June.
    5. Halpern, P. J. & Turnbull, S. M., 1983. "Legal fees contracts and alternative cost rules: An economic analysis," International Review of Law and Economics, Elsevier, vol. 3(1), pages 3-26, June.
    6. 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 549-572, October.
    7. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March.
    8. Patricia Munch Danzon, 1983. "Contingent Fees for Personal Injury Litigation," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 213-224, Spring.
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    Cited by:

    1. Christoph Engel & Heike Hennig‐Schmidt & Bernd Irlenbusch & Sebastian Kube, 2015. "On Probation: An Experimental Analysis," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 12(2), pages 252-288, June.
    2. Cotten, Stephen J. & Santore, Rudy, 2012. "Contingent fee caps, screening, and the quality of legal services," International Review of Law and Economics, Elsevier, vol. 32(3), pages 317-328.
    3. Eisenkopf, Gerald & Friehe, Tim & Wohlschlegel, Ansgar, 2019. "On the role of emotions in experimental litigation contests," International Review of Law and Economics, Elsevier, vol. 57(C), pages 90-94.
    4. Gabuthy, Yannick & Peterle, Emmanuel & Tisserand, Jean-Christian, 2021. "Legal Fees, Cost-Shifting Rules and Litigation: Experimental Evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 93(C).
    5. Baumann, Florian & Friehe, Tim, 2014. "On discovery, restricting lawyers, and the settlement rate," DICE Discussion Papers 155, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Bradley Graham & Jack Robles, 2014. "Moral hazard and legal services contracts," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 219-230, September.
    7. Baik Kyung Hwan, 2008. "Attorneys' Compensation in Litigation with Bilateral Delegation," Review of Law & Economics, De Gruyter, vol. 4(1), pages 259-289, August.
    8. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    9. Andrew F. Daughtey & Jennifer F. Reinganum, 2010. "Clients, Lawyers, Second Opinions, and Agency," Vanderbilt University Department of Economics Working Papers 1009, Vanderbilt University Department of Economics.
    10. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Search, Bargaining, And Agency in the Market for Legal Services," Vanderbilt University Department of Economics Working Papers 1106, Vanderbilt University Department of Economics.
    11. Zamir Eyal & Medina Barak & Segal Uzi, 2014. "Who Benefits from the Uniformity of Contingent Fee Rates?," Review of Law & Economics, De Gruyter, vol. 9(3), pages 357-387, January.
    12. Eyal Zamir & Ilana Ritov, 2010. "Revisiting the Debate over Attorneys' Contingent Fees: A Behavioral Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 39(1), pages 245-288, January.

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