Contingent fees and endogenous timing in litigation contests

This study examined the contingent fee arrangements and adversarial systems applied in the United States. In the American context, a plaintiff (or a defendant) pays a contingent fee (an hourly fee) to their lawyer. In this adversarial system, lawyers can either be the first or the second mover. Solving the American practice with endogenous timing of litigation efforts, we obtained the following results: (i) if the defendant’s total hourly fee rate is not sufficiently high, the plaintiff’s lawyer is the first mover, with the plaintiff then being the underdog and (ii) if the rate is sufficiently high, the lawyer is the second mover, with the plaintiff then being the favorite. We demonstrated that these results are not ideal for the plaintiff. The equilibrium order of effort increases the equilibrium contingent fee and total legal effort in the trial, making reaching a settlement difficult. However, this improves the justice achieved through litigation if the total hourly fee rate is not significantly high. We suggest that the American practice of contingent fees with endogenous timing of effort is not economically efficient but is suitable for achieving justice.