IDEAS home Printed from https://ideas.repec.org/a/ucp/jlstud/v39y2010i1p245-288.html
   My bibliography  Save this article

Revisiting the Debate over Attorneys' Contingent Fees: A Behavioral Analysis

Author

Listed:
  • Eyal Zamir
  • Ilana Ritov

Abstract

Building on Kahneman and Tversky's prospect theory, this paper presents a series of experiments designed to reveal people's preferences regarding attorneys' fees. Contrary to common economic wisdom, it demonstrates that loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clients' preferences for contingent-fee arrangements. Facing a choice between a mixed gamble and a pure positive one, plaintiffs prefer a contingent fee (framed as a pure positive gamble), even if it yields an expected fee that is 2 or 3 times higher than a noncontingent one (framed as a mixed gamble). At the same time, defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees. Our findings indicate that information problems and lack of alternative fee arrangements probably do not loom large in clients' choice of fee arrangement. We discuss the policy implications of our findings. (c) 2010 by The University of Chicago. All rights reserved.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jlstud:v:39:y:2010:i:1:p:245-288
    DOI: 10.1086/605510
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/605510
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1086/605510?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    2. Rickman, Neil, 1994. "The Economics of Contingency Fees in Personal Injury Litigation," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 10(1), pages 34-50, Spring.
    3. Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, February.
    4. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    5. Olsen, Robert A., 1997. "Prospect theory as an explanation of risky choice by professional investors: Some evidence," Review of Financial Economics, Elsevier, vol. 6(2), pages 225-232.
    6. 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.
    7. Lei Feng & Mark Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, Springer, vol. 9(3), pages 305-351, September.
    8. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    9. Miceli, Thomas J & Segerson, Kathleen, 1991. "Contingent Fees for Lawyers: The Impact on Litigation and Accident Prevention," The Journal of Legal Studies, University of Chicago Press, vol. 20(2), pages 381-399, June.
    10. 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.
    11. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    12. 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.
    13. Lei Feng & Mark S. Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, European Finance Association, vol. 9(3), pages 305-351.
    14. Babcock, Linda & Farber, Henry S. & Fobian, Cynthia & Shafir, Eldar, 1995. "Forming beliefs about adjudicated outcomes: Perceptions of risk and reservation values," International Review of Law and Economics, Elsevier, vol. 15(3), pages 289-303, September.
    15. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    16. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    17. Eric Helland, 2003. "Contingency Fees, Settlement Delay, and Low-Quality Litigation: Empirical Evidence from Two Datasets," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 517-542, October.
    18. Thomason, Terry, 1991. "Are Attorneys Paid What They're Worth? Contingent Fees and the Settlement Process," The Journal of Legal Studies, University of Chicago Press, vol. 20(1), pages 187-223, January.
    19. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    20. Winand Emons & Nuno Garoupa, 2006. "US-style contingent fees and UK-style conditional fees: agency problems and the supply of legal services," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(5), pages 379-385.
    21. 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.
    22. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    23. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    24. A. Mitchell Polinsky & Daniel L. Rubinfeld, 2003. "Aligning the Interests of Lawyers and Clients," American Law and Economics Review, American Law and Economics Association, vol. 5(1), pages 165-188.
    25. Baron, Jonathan & Ritov, Ilana, 1993. "Intuitions about Penalties and Compensation in the Context of Tort Law," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 17-33, August.
    26. repec:cdl:oplwec:qt2kz8r3j1 is not listed on IDEAS
    27. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 1-53.
    28. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March.
    29. Patricia Munch Danzon, 1983. "Contingent Fees for Personal Injury Litigation," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 213-224, Spring.
    30. John W. Payne & Dan J. Laughhunn & Roy Crum, 1980. "Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior," Management Science, INFORMS, vol. 26(10), pages 1039-1060, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emons, Winand & Fluet, Claude, 2016. "Why plaintiffs’ attorneys use contingent and defense attorneys fixed fee contracts," International Review of Law and Economics, Elsevier, vol. 47(C), pages 16-23.
    2. Cédric Argenton & Xiaoyu Wang, 2023. "Litigation and settlement under loss aversion," European Journal of Law and Economics, Springer, vol. 56(2), pages 369-402, October.
    3. Argenton, Cedric & Wang, Xiaoyu, 2020. "Litigation and Settlement under Loss Aversion," Other publications TiSEM b6c48abc-9b47-4c3b-848b-3, Tilburg University, School of Economics and Management.
    4. Lin, Chang-Ching & Chang, Yun-chien & Chen, Kong-Pin, 2020. "Knowledge in youth is wisdom in age: an empirical study of attorney experience in torts litigation," International Review of Law and Economics, Elsevier, vol. 63(C).
    5. 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.
    6. Eyal Zamir & Ilana Ritov, 2012. "Loss Aversion, Omission Bias, and the Burden of Proof in Civil Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 41(1), pages 165-207.
    7. Frances Xu Lee & Yuk‐fai Fong, 2017. "Signaling by an informed service provider," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(4), pages 955-968, December.
    8. Haber, Stephen H. & Werfel, Seth H., 2016. "Patent trolls as financial intermediaries? Experimental evidence," Economics Letters, Elsevier, vol. 149(C), pages 64-66.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eyal Zamir & Ilana Ritov, 2012. "Loss Aversion, Omission Bias, and the Burden of Proof in Civil Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 41(1), pages 165-207.
    2. Frank H. Stephen, 2013. "Lawyers, Markets and Regulation," Books, Edward Elgar Publishing, number 14803.
    3. Emons, Winand & Garoupa, Nuno, 2004. "The Economics of US-Style Contingent Fees and UK-Style Conditional Fees," CEPR Discussion Papers 4473, C.E.P.R. Discussion Papers.
    4. Nobel Prize Committee, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    5. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    6. 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.
    7. Foellmi, Reto & Jaeggi, Adrian & Rosenblatt-Wisch, Rina, 2019. "Loss aversion at the aggregate level across countries and its relation to economic fundamentals," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    8. Olapeju Comfort Ogunmokun & Oluwasoye P. Mafimisebi & Demola Obembe, 2023. "Prospect theory and bank credit risk decision-making behaviour: a systematic literature review and future research agenda," SN Business & Economics, Springer, vol. 3(4), pages 1-25, April.
    9. Nuno Garoupa & Fernando Gómez, 2002. "Cashing by the hour: Why large law firms prefer hourly fees over contingent fees," Economics Working Papers 639, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    11. De Borger, Bruno & Fosgerau, Mogens, 2007. "Discrete choices and the trade-off between money and time: A test of the theory of reference-dependent preferences," MPRA Paper 3904, University Library of Munich, Germany.
    12. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    13. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    14. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    15. Per Engström & Katarina Nordblom & Henry Ohlsson & Annika Persson, 2015. "Tax Compliance and Loss Aversion," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 132-164, November.
    16. Alex Markle & George Wu & Rebecca White & Aaron Sackett, 2018. "Goals as reference points in marathon running: A novel test of reference dependence," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 19-50, February.
    17. Tovar, Patricia, 2009. "The effects of loss aversion on trade policy: Theory and evidence," Journal of International Economics, Elsevier, vol. 78(1), pages 154-167, June.
    18. Fabian Herweg & Klaus M. Schmidt, 2015. "Loss Aversion and Inefficient Renegotiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 297-332.
    19. Eyal Ert & Ido Erev, 2010. "On the Descriptive Value of Loss Aversion in Decisions under Risk," Harvard Business School Working Papers 10-056, Harvard Business School.
    20. DE BORGER, Bruno & FOSGERAU, Mogens, 2006. "Discrete choices and the trade off between money and time: Another test of the theory of reference-dependent preferences," Working Papers 2006034, University of Antwerp, Faculty of Business and Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jlstud:v:39:y:2010:i:1:p:245-288. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JLS .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.