Legal fee restrictions, moral hazard, and attorney profits

Rudy Santore and Alan Viard ()

No 9912, Working Papers from Federal Reserve Bank of Dallas

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.

Pages: 25 pages
Date: 1999
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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Citations: View citations in EconPapers (4)

Published in Journal of Law and Economics, 44(2), Part I, October 2001

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