Strategic Decisions on Lawyers' Compensations in Civil Disputes
We study a model of civil dispute with delegation in which a plaintiff's lawyer works on a contingent fee basis but a defendant's lawyer on an hourly fee basis. We first derive the conditions under which delegation to the lawyers brings both the plaintiff and defendant more payoffs, compared to the case of no delegation. We then show: (i) one third of the award as a contingent fee is strategically determined and indeed an equilibrium outcome; (ii) delegation reduces the total legal expenditures; (iii) the plaintiff wants to stick with the contingent fee scheme as long as the defendant chooses the hourly fee scheme; (iv) the plaintiff prefers the American practice of contingent fees to the European practice with legal cost insurance where contingent fees are absent; and (v) the American practice usually incurs less legal expenditures than the European one.
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