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Legal fee restrictions, moral hazard, and attorney profits

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  • Rudy Santore
  • Alan D. Viard

Abstract

When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.

Suggested Citation

  • Rudy Santore & Alan D. Viard, 1999. "Legal fee restrictions, moral hazard, and attorney profits," Working Papers 9912, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:99-12
    Note: Published as: Santore, Rudy and Alan D. Viard (2001), "Legal Fee Restrictions, Moral Hazard, and Attorney Profits," Journal of Law and Economics 44 (2): 549-572.
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Hyde, Charles E. & Williams, Philip L., 2002. "Necessary costs and expenditure incentives under the English rule," International Review of Law and Economics, Elsevier, vol. 22(2), pages 133-152, August.
    2. Florian Baumann & Tim Friehe, 2012. "Contingent fees meet the British rule: an exploratory study," Public Choice, Springer, vol. 150(3), pages 499-510, March.
    3. Bruce, Donald & Santore, Rudy, 2006. "On optimal real estate commissions," Journal of Housing Economics, Elsevier, vol. 15(2), pages 156-166, June.
    4. 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.

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