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Cashing by the Hour: Why Large Law Firms Prefer Hourly Fees Over Contingent Fees

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Author Info
Nuno Garoupa
Fernando Gómez

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Abstract

Large law firms seem to prefer hourly fees over contingent fees. This paper provides a moral hazard explanation for this pattern of behavior. Contingent legal fees align the interests of the attorney with those of the client, but not necessarily with those of the partnership. We show that the choice of hourly fees is a solution to an agency problem with multiple principals, where the interests of one principal (law firm) collide with the interests of the other principal (client).

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File URL: http://www.econ.upf.edu/docs/papers/downloads/639.pdf
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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 639.

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Date of creation: Jul 2002
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Handle: RePEc:upf:upfgen:639

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Related research
Keywords: Law firms; legal fees; moral hazard; risk-sharing;

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
L8 - Industrial Organization - - Industry Studies: Services

This paper has been announced in the following NEP Reports:

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Daniel F. Rubinfeld & Suzanne Scotchmer, 1993. "Contingent Fees for Attorneys: An Economic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 343-356, Autumn. [Downloadable!] (restricted)
  2. Gravelle, Hugh & Waterson, Michael, 1993. "No Win, No Fee: Some Economics of Contingent Legal Fees," Economic Journal, Royal Economic Society, vol. 103(420), pages 1205-20, September. [Downloadable!] (restricted)
  3. Robert M. Sauer, 1998. "Job Mobility and the Market for Lawyers," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 147-171, February. [Downloadable!] (restricted)
  4. James B. Rebitzer & Lowell J. Taylor, 2006. "When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms," NBER Working Papers 12583, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Rickman, Neil, 1999. "Contingent fees and litigation settlement1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 295-317, September. [Downloadable!] (restricted)
  6. Santore, Rudy & Viard, Alan D, 2001. "Legal Fee Restrictions, Moral Hazard, and Attorney Rights," Journal of Law & Economics, University of Chicago Press, vol. 44(2), pages 549-72, October.
  7. Lynk, William J, 1990. "The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation," Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 247-60, January.
  8. Rebitzer, James B & Taylor, Lowell J, 1995. "Efficiency Wages and Employment Rents: The Employer-Size Wage Effect in the Job Market for Lawyers," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 678-708, October. [Downloadable!] (restricted)
  9. Hay, Bruce L, 1996. "Contingent Fees and Agency Costs," Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 503-33, June.
  10. 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. [Downloadable!] (restricted)
  11. Miceli, Thomas J, 1994. "Do Contingent Fees Promote Excessive Litigation?," Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 211-24, January.
  12. Spurr, Stephen J, 1987. "How the Market Solves an Assignment Problem: The Matching of Lawyers with Legal Claims," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 502-32, October. [Downloadable!] (restricted)
  13. Rosen, S., 1991. "The Market for Lawyers," University of Chicago - Economics Research Center 91-10, Chicago - Economics Research Center.
    Other versions:
  14. Christopher Ferrall, 1996. "Promotions and Incentives in Partnerships: Evidence from Major U.S. Law Firms," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 811-27, November. [Downloadable!] (restricted)
  15. Dana, James D, Jr & Spier, Kathryn E, 1993. "Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 349-67, October.
  16. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March. [Downloadable!] (restricted)
  17. O'Flaherty, Brendan & Siow, Aloysius, 1995. "Up-or-Out Rules in the Market for Lawyers," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 709-35, October. [Downloadable!] (restricted)
    Other versions:
  18. A. Mitchell Polinsky & Daniel L. Rubinfeld, 2003. "Aligning the Interests of Lawyers and Clients," American Law and Economics Review, Oxford University Press, vol. 5(1), pages 165-188.
    Other versions:
  19. Hay, Bruce L, 1997. "Optimal Contingent Fees in a World of Settlement," Journal of Legal Studies, University of Chicago Press, vol. 26(1), pages 259-78, January.
  20. Patricia Munch Danzon, 1983. "Contingent Fees for Personal Injury Litigation," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 213-224, Spring. [Downloadable!] (restricted)
  21. Miceli, Thomas J & Segerson, Kathleen, 1991. "Contingent Fees for Lawyers: The Impact on Litigation and Accident Prevention," Journal of Legal Studies, University of Chicago Press, vol. 20(2), pages 381-99, June.
  22. Jonathan Levin, 2002. "A Theory of Partnerships," Theory workshop papers 505798000000000002, UCLA Department of Economics. [Downloadable!]
  23. Carr, Jack & Mathewson, Frank, 1990. "The Economics of Law Firms: A Study in the Legal Organization of the Firm," Journal of Law & Economics, University of Chicago Press, vol. 33(2), pages 307-30, October.
  24. 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. [Downloadable!] (restricted)
    Other versions:
  25. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-48, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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