Tuesday, December 10, 2013

Mechanism design in attorney fees

When it comes to extracting money from clients, you cannot deny that attorneys have learned their Economics. You cannot say the same about the rest of the legal profession, though. So what makes attorneys so smart? Look at how they evaluate which cases to take. It is not about justice for the plaintiff, it is all about what will give them the highest expected return. And the fee schedule can change dramatically according to circumstances.

Take the paper by Winand Emons and Claude Fluet. They observe that defense attorneys use fixed fee contracts while those representing plaintiffs use contingent contracts with a smallish fixed fee. The latter are offered because it provides incentives to pursue strong cases only, they say. Defense attorneys fight all cases, while plaintiff ones can select, and they do it in a way that makes it worth their time. In addition the latter have privileged information: they can figure out the expected winnings, while the plaintiffs are in the dark. The attorneys thus adjust the schedule accordingly. With all this, I wonder whether there is a way to regulate the fees, say by allowing only particular fee structures, that would maximize the well-being of plaintiffs or some combination of plaintiffs, defense and attorneys, not attorneys only.

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