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How Do Risk-Averse Litigants Set Contingent Fees for Risk-Neutral Lawyers?

Author

Listed:
  • Park Sung-Hoon

    (Department of Economics, Chosun University, 309 Philmoondaero, Dong-gu, Gwangju, Korea)

  • Lee Sanghack

    (Department of International Commerce, Kookmin University, Seoul136–702, Korea)

Abstract

We examine a two-stage litigation in which risk-averse litigants set contingent fees strategically for risk-neutral lawyers. In the first stage of the litigation, each litigant sets a fixed fee and a contingent fee for his lawyer. In the second stage, each lawyer exerts effort to win a lawsuit on behalf of the litigant. Employing the subgame-perfect equilibrium as a solution concept, we obtain the following results. First, if a litigant sets a higher rate of contingent fee, then the opponent follows suit and the contingent fee fraction increases in the difference in litigant’s utility between winning and losing the case. Second, changes in a litigant’s initial endowment have different effects on the contingent fee fraction depending upon litigant preferences, while an increase in the prize of the case always increases the contingent fee fraction regardless of litigant preferences.

Suggested Citation

  • Park Sung-Hoon & Lee Sanghack, 2019. "How Do Risk-Averse Litigants Set Contingent Fees for Risk-Neutral Lawyers?," Review of Law & Economics, De Gruyter, vol. 15(2), pages 1-19, July.
    • Handle: RePEc:bpj:rlecon:v:15:y:2019:i:2:p:19:n:3
    DOI: 10.1515/rle-2016-0034
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    References listed on IDEAS

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    1. Lee, Sanghack, 1995. "Endogenous Sharing Rules in Collective-Group Rent-Seeking," Public Choice, Springer, vol. 85(1-2), pages 31-44, October.
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    3. Kyung Hwan Baik, 2007. "Equilibrium Contingent Compensation in Contests with Delegation," Southern Economic Journal, Southern Economic Association, vol. 73(4), pages 986-1002, April.
    4. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, Decembrie.
    5. Kyung Hwan Baik, 2007. "Equilibrium Contingent Compensation in Contests with Delegation," Southern Economic Journal, John Wiley & Sons, vol. 73(4), pages 986-1002, April.
    6. Stefan Brandauer & Florian Englmaier, 2009. "A model of strategic delegation in contests between groups," Review of Economic Design, Springer;Society for Economic Design, vol. 13(3), pages 205-232, September.
    7. 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.
    8. Baik Kyung Hwan, 2008. "Attorneys' Compensation in Litigation with Bilateral Delegation," Review of Law & Economics, De Gruyter, vol. 4(1), pages 259-289, August.
    9. Lambert Schoonbeek, 2007. "Delegation with multiple instruments in a rent-seeking contest," Public Choice, Springer, vol. 131(3), pages 453-464, June.
    10. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March.
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    Cited by:

    1. Sung-Hoon Park, 2022. "Contingent fees and endogenous timing in litigation contests," European Journal of Law and Economics, Springer, vol. 54(3), pages 453-473, December.
    2. Park Sung-Hoon & Lee Sanghack, 2020. "Legal Contests with Unilateral Delegation," Asian Journal of Law and Economics, De Gruyter, vol. 11(1), pages 1-9, April.

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    More about this item

    Keywords

    bilateral delegation; contingent fee; initial endowment; litigation; risk aversion;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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