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Moral hazard and legal services contracts

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  • Bradley Graham
  • Jack Robles

Abstract

We examine legal services contracts characterized by a contingency fee and an hours reporting requirement in a moral hazard setting. We find that hours reporting requirements in contingency contracts can reduce the rent needed to induce high attorney effort under moral hazard. Under certain conditions, the ability to set hours above the first-best level leads a client to choose a contract inducing high effort when she otherwise would not. The important condition of this result is, however, that hours must be contractible. We apply our model to the 2010 Florida “sunshine” law that requires hours reporting by private attorneys employed on a contingency fee basis by the attorney general. We find the sunshine laws of Florida and other states may, in addition to providing more transparency in government contracting, increase the public benefit from an attorney general’s employment of private attorneys. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • 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.
    • Handle: RePEc:spr:inrvec:v:61:y:2014:i:3:p:219-230
    DOI: 10.1007/s12232-014-0198-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Legal services contract; Moral hazard; Contingent fee; Sunshine law; K40; K41;
    All these keywords.

    JEL classification:

    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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