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The optimality of contingent fees in the agency problem of litigation

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  • Wang, Susheng

Abstract

Linear contracts are of particular interest to economists. They have a simple structure, yet they are very popular in practice. In this regard, plaintiff-lawyer contractual relationships are of particular interest. Lawyers' fees are mostly paid by a sharing rule and they are typically a fixed proportion of the recovery across all lawsuits of the same type and this fixed proportion typically stays constant for many years. Such a simple and stable form of contract is puzzling to contract theorists. This paper presents a simple agency model with a risk-averse principal and a risk-neutral agent. We show that the observed puzzling features of contracts in litigation are in fact optimal behaviors, if a lawyer's effort has a constant marginal cost.

Suggested Citation

  • Wang, Susheng, 2008. "The optimality of contingent fees in the agency problem of litigation," International Review of Law and Economics, Elsevier, vol. 28(1), pages 23-31, March.
    • Handle: RePEc:eee:irlaec:v:28:y:2008:i:1:p:23-31
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    References listed on IDEAS

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    1. Joseph M. Fisher, 1988. "Contingent And Noncontingent Attorneys' Fees In Personal Injury Cases," Contemporary Economic Policy, Western Economic Association International, vol. 6(3), pages 108-121, July.
    2. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    3. 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.
    4. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    5. Hay, Bruce L, 1996. "Contingent Fees and Agency Costs," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 503-533, June.
    6. Kim, Son Ku & Wang, Susheng, 1998. "Linear Contracts and the Double Moral-Hazard," Journal of Economic Theory, Elsevier, vol. 82(2), pages 342-378, October.
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    Cited by:

    1. At, Christian & Gabuthy, Yannick, 2015. "Moral hazard and agency relationship in sequential litigation," International Review of Law and Economics, Elsevier, vol. 41(C), pages 86-90.
    2. Yannick Gabuthy & Pierre-Henri Morand, 2019. "Lawyer Fee Arrangements and Litigation Outcomes: An Auction-Theoretic Perspective," Working Papers of BETA 2019-03, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Gabuthy, Yannick & Peterle, Emmanuel & Tisserand, Jean-Christian, 2021. "Legal Fees, Cost-Shifting Rules and Litigation: Experimental Evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 93(C).

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