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A note on settlements under the contingent fee method of compensating lawyers

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  • Polinsky, A. Mitchell
  • Rubinfeld, Daniel L.

Abstract

It is commonly thought that a lawyer working under a contingent fee arrangement has an excessive motive — relative to his client’s interest — to settle the case, leading to a lower-than-desirable settlement amount and a high settlement rate. The conventional analysis that generates this conclusion omits an important consideration — that if the case were to go to trial, the lawyer would spend an inadequate amount of time on it. We demonstrate that once this effect is taken into account, the lawyer could have an insufficient motive to settle, the opposite of what is usually believed. Specifically, the lawyer’s settlement demand could be too high and the resulting settlement rate too low.
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Suggested Citation

  • 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.
    • Handle: RePEc:eee:irlaec:v:22:y:2002:i:2:p:217-225
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    References listed on IDEAS

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    1. Gravelle, Hugh & Waterson, Michael, 1993. "No Win, No Fee: Some Economics of Contingent Legal Fees," Economic Journal, Royal Economic Society, vol. 103(420), pages 1205-1220, September.
    2. Rickman, Neil, 1999. "Contingent fees and litigation settlement1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 295-317, September.
    3. Miceli, Thomas J, 1994. "Do Contingent Fees Promote Excessive Litigation?," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 211-224, January.
    4. 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.
    5. 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.
    6. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
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    Cited by:

    1. Winand Emons & Nuno Garoupa, 2004. "The Economics of US-style Contingent Fees and UK-style Conditional Fees," Diskussionsschriften dp0407, Universitaet Bern, Departement Volkswirtschaft.
    2. Baumann, Florian & Friehe, Tim, 2014. "On discovery, restricting lawyers, and the settlement rate," DICE Discussion Papers 155, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. 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.
    4. Bradley Graham & Jack Robles, 2014. "Moral hazard and legal services contracts," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 219-230, September.
    5. 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.
    6. Alberto Casagrande & Marco Spallone, 2007. "Investigating the determinants of pretrial settlement rates: contingent versus non-contingent lawyers’ fees," European Journal of Law and Economics, Springer, vol. 24(1), pages 1-13, August.
    7. Friehe, Tim & Gabuthy, Yannick & Lambert, Eve-Angéline, 2020. "Settlement implications of lawyer advertising," International Review of Law and Economics, Elsevier, vol. 61(C).
    8. Amy Fanner & Paul Pecorino, 2005. "Dispute Rates and Contingency Fees: An Analysis from the Signaling Model," Southern Economic Journal, John Wiley & Sons, vol. 71(3), pages 566-581, January.
    9. Finkle Aaron & Shin Dongsoo, 2010. "Disregarding the Attorney's Advice: An Agency Perspective," Review of Law & Economics, De Gruyter, vol. 6(2), pages 197-217, September.
    10. 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.
    11. Yang, Erya, 2020. "Optimism and pessimism in bargaining and contests," International Review of Law and Economics, Elsevier, vol. 64(C).

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