Abstract
Under contingent fees, the attorney gets a share of the judgement; under conditional fees they get an upscale premium if the case is won, which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a framework where lawyers choose between a safe and a risky litigation strategy. Under conditional fees, lawyers prefer the safe strategy, under contingent fees the risky one. Risk-averse plaintiffs prefer conditional fees over contingent fees when lawyering costs are low and vice versa for high lawyering costs.
Highlights
The use of contingent legal fees is widespread in the US
Under conditional fees the lawyer gets an upscale premium if the case is won
We show that the risk-neutral lawyer will play it safe with conditional fees, but will go for risk with contingent fees
Summary
The use of contingent legal fees is widespread in the US. In a wellknown empirical study, Kritzer (1990) presents suggestive data. Under conditional fees the lawyer gets an upscale premium if the case is won. This premium is not related to the adjudicated amount. She prefers the safe strategy if she receives the entire amount at stake, even though the expected judgement is lower. With this assumption we create a potential conflict of interest between the risk-averse plaintiff and her risk-neutral lawyer. The client chooses conditional fees when lawyer’s reservation utility is low; this result follows immediately from our assumption that the client prefers to play it safe when she gets the entire judgement.
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