Contingent Fees and Agency Costs

Abstract

In this article, I examine the operation of ordinary linear contingent fees in a model of litigation in which the recovery on a claim is a function of the lawyer's efforts. My object here is to analyze the linear fee that maximizes the client's welfare in the presence of attorney moral hazard. I identify the optimal fee as the one that minimizes two agency costs: underinvestment in the claim, and attorney rents. I also attempt to identify how the optimal linear fee varies with different case characteristics.