Abstract
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.
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