Who Benefits from the Uniformity of Lawyers' Contingent Fee Rates?
Review of Law and Economics, Forthcoming
27 Pages Posted: 18 Oct 2013
Date Written: February 2013
Lawyers’ Contingent Fee (CF) rates are rather uniform, often one-third of the recovery. Arguably, this uniformity is a type of anti-competitive price-fixing, which results in clients paying supra-competitive fees. This paper challenges this argument. It shows that uniform CF rates provide clients with an important advantage, as they enable them to make a de facto "take-it-or-leave-it" offer. Consequently, lawyers cannot exploit their private information, and clients retain the transaction’s entire surplus and may hire the best lawyer among those who find it profitable to handle the case.
The paper also addresses the effect of uniformity of CF rates when lawyers refer cases to other lawyers. It shows that uniformity facilitates matching of clients and lawyers through the referral system. It also demonstrates that the fact that both direct clients and those obtained through paid-for referrals pay the same CF rate does not attest to cross-subsidization. The clients whose cases are transferred for a referral fee (paid by the handling lawyer) "pay" for the referral service by obtaining a less highly ranked lawyer.
Keywords: Contingent Fee, lawyers, bargaining, uniformity of fees, referrals, search, Asymmetric Information
JEL Classification: D43, D82, D83, K23, K41
Suggested Citation: Suggested Citation