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Optimal Contingent Fees in a World of Settlement

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  • Hay, Bruce L

Abstract

This article examines the design of contingent fees for plaintiffs' lawyers in a legal system that gives parties the choice between going to trial and settling out of court. Using a simple principal-agent model with attorney moral hazard, the article shows that the client generally benefits from a bifurcated fee structure in which the attorney gets a large fraction of the recovery in the event of trial but a small fraction in the event of settlement; this structure maximizes both the size of the recovery and the client's distributive share of it. The article also examines the limits on the use of this fee structure that are imposed by two aspects of the settlement bargaining process: (1) the allocation of settlement authority between lawyer and client, and (2) the relative bargaining power of plaintiff and defendant. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Hay, Bruce L, 1997. "Optimal Contingent Fees in a World of Settlement," The Journal of Legal Studies, University of Chicago Press, vol. 26(1), pages 259-278, January.
    • Handle: RePEc:ucp:jlstud:v:26:y:1997:i:1:p:259-78
    DOI: 10.1086/467995
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    Cited by:

    1. Kyung Hwan Baik & In‐Gyu Kim, 2007. "Strategic Decisions On Lawyers’ Compensation In Civil Disputes," Economic Inquiry, Western Economic Association International, vol. 45(4), pages 854-863, October.
    2. Winand Emons & Nuno Garoupa, 2004. "The Economics of US-style Contingent Fees and UK-style Conditional Fees," Diskussionsschriften dp0407, Universitaet Bern, Departement Volkswirtschaft.
    3. At Christian & Friehe Tim & Gabuthy Yannick, 2019. "On Lawyer Compensation When Appeals Are Possible," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(2), pages 1-11, April.
    4. 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).
    5. 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.
    6. Philippe Delacote & Lydie Ancelot, 2009. "Prosecutor and lawyers in plea bargaining with complete information," Economics Bulletin, AccessEcon, vol. 29(3), pages 1925-1932.
    7. Andrew F. Daughtey & Jennifer F. Reinganum, 2010. "Clients, Lawyers, Second Opinions, and Agency," Vanderbilt University Department of Economics Working Papers 1009, Vanderbilt University Department of Economics.
    8. 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).
    9. Rudy Santore & Alan D. Viard, 1999. "Legal fee restrictions, moral hazard, and attorney profits," Working Papers 9912, Federal Reserve Bank of Dallas.
    10. Ayouni, Mehdi & Friehe, Tim & Gabuthy, Yannick, 2024. "Bayesian persuasion in lawyer–client communication," International Review of Law and Economics, Elsevier, vol. 78(C).
    11. 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.
    12. Lambert Schoonbeek & Peter Kooreman, 2005. "No cure, be paid: super-contingent fee contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 12(9), pages 549-551.
    13. 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.
    14. Hyde, Charles E., 2006. "Conditional versus contingent fees: Litigation expenditure incentives," International Review of Law and Economics, Elsevier, vol. 26(2), pages 180-194, June.
    15. Deffains, Bruno & Doriat, Myriam, 1999. "The dynamics of pretrial negotiation in France:: Is there a deadline effect in the French legal system?," International Review of Law and Economics, Elsevier, vol. 19(4), pages 447-470, December.
    16. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Search, Bargaining, And Agency in the Market for Legal Services," Vanderbilt University Department of Economics Working Papers 1106, Vanderbilt University Department of Economics.

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