Clients, Lawyers, Second Opinions, and Agency

Andrew Daughtey () and Jennifer Reinganum ()
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Andrew Daughtey: Department of Economics and Law School, Vanderbilt University
Authors registered in the RePEc Author Service: Andrew F. Daughety

No 1009, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We model the game between an informed seller (a lawyer) and an uninformed buyer (a potential client) over the choice of compensation for the lawyer to take a case to trial, when there is post-contracting investment by the lawyer (effort at trial) that involves moral hazard. Clients incur a one-time search cost to contact a lawyer, which parametrically influences the monopoly power of the lawyer when he makes a demand of the client for compensation for his service. The client uses the demand to decide whether to contract with the lawyer or to visit a second lawyer so as to seek a second opinion, which incurs a second search cost. Seeking a second opinion shifts the bargaining power to the client by causing the lawyers to bid for the right to represent the client. We allow for endogenously-determined contingent fees alone (that is, the lawyer covers all costs and obtains a percentage of any amount won at trial) or endogenously-determined contingent fees and transfers; in this latter analysis, lawyers could buy the client�s case. Under asymmetric information with only a contingent fee, in equilibrium the first lawyer visited demands a higher contingent fee for lower-valued cases, signaling the case�s value to the client. If a transfer is also allowed, then in equilibrium the higher contingent fee (and transfer from the lawyer to the client) is obtained by the more valuable case, with only the highest-value case resulting in the lawyer buying the entire case (100% contingent fee with a transfer); again, in equilibrium, the value of the case is signaled. In both settings the client uses an equilibrium strategy that involves seeking a second opinion a fraction of the time, which induces separation. In equilibrium the presence of asymmetric information does not affect the client�s expected payoff, but it does reduce the lawyer�s expected payoff and it does increase moral-hazard-induced inefficiency on the part of the lawyer in the post-contracting investment.

Keywords: Signaling; Agency; Search; Contingent Fee (search for similar items in EconPapers)
JEL-codes: D8 K4 L2 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-cta and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:1009

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