Legal fee restrictions, moral hazard, and attorney profits
When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.
|Date of creation:||1999|
|Publication status:||Published in Journal of Law and Economics, 44(2), Part I, October 2001|
|Note:||Published as: Santore, Rudy and Alan D. Viard (2001), "Legal Fee Restrictions, Moral Hazard, and Attorney Profits," Journal of Law and Economics 44 (2): 549-572.|
|Contact details of provider:|| Web page: http://www.dallasfed.org/|
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- Hay, Bruce L, 1997. "Optimal Contingent Fees in a World of Settlement," The Journal of Legal Studies, University of Chicago Press, vol. 26(1), pages 259-278, January.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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