Contingent Fees with Legal Discovery

Florian Baumann and Tim Friehe

American Law and Economics Review, 2016, vol. 18, issue 1, 155-175

Abstract: This paper analyzes the principal-agent relationship between a plaintiff and her lawyer when the lawyer chooses the settlement offer and undertakes legal discovery. Our objective was to highlight the implications of discovery for the contingent-fee arrangement that is optimal for the plaintiff. We consider bifurcated contingent fees and show that the consideration of legal discovery attenuates the standard asymmetry between the contingent fee for a settlement and the contingent fee for a judgment. To obtain the maximal joint surplus of the plaintiff–lawyer pair, the arrangement must specify nonlinear contingent fees.

Date: 2016
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