The Puzzling Uniformity of Lawyers’ Contingent Fee Rates: An Assortative Matching Solution
26 Pages Posted: 17 Jan 2012 Last revised: 1 Apr 2016
Date Written: January 16, 2012
Lawyers’ Contingent Fee (CF) rates are rather uniform, often one-third of the recovery. Arguably, this uniformity attests to collusion in the market, resulting in clients paying supra-competitive fees. This paper challenges this common argument.
Uniform CF rates are not necessarily superior to negotiable ones; yet they provide clients with an important advantage. They result in clients making a defacto “take-it-or-leave-it” offer. It precludes lawyers from exploiting their private information about the lawsuit’s expected value and the amount of work it requires. The uniformity of CF rates enables clients to hire the best available lawyer, either directly, if clients know lawyers’ ranking, or indirectly, through the referral system. This uniformity thus fosters a positive assortative matching of lawyers and clients. Finally, the fact that both direct clients and clients obtained through paid-for referrals pay the same CF rate does not attest to cross-subsidization, as the cases a lawyer gets through referrals are quite different than those she gets directly.
Keywords: lawyers, contingent fee, uniform prices, information asymmetry
JEL Classification: D49, D82, J41, K23, K41
Suggested Citation: Suggested Citation