Dispute Rates and Contingency Fees: An Analysis from the Signaling Model

U of Alabama Economics Working Paper No. 02-06-02

32 Pages Posted: 21 Jul 2001

See all articles by Amy Farmer

Amy Farmer

University of Arkansas - Department of Economics

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: November 2003

Abstract

We analyze contingency fees in the Reinganum and Wilde (1986) signaling model of litigation. The effect of contingency fees on settlement depends upon the details of the contingency fee contract and the nature of the informational asymmetry assumed in the model. Introducing bifurcated fee contracts where the contingency percentage is higher at trial changes the selection of disputes at trial, but has ambiguous effects on the overall dispute rate when an informed plaintiff makes the offer. For reasonable parameter values, it increases settlement in the model where the informed defendant makes the offer. Introduction of a unitary contingency fee in which the contingency percentage is the same in a pretrial settlement as at trial, unambiguously increases the incidence of trial in both variations of the signaling model. The interaction of fee shifting with contingency fees is also analyzed.

Keywords: Contingency fees; Pretrial Settlement; Signaling

JEL Classification: K4, D8

Suggested Citation

Farmer, Amy and Pecorino, Paul, Dispute Rates and Contingency Fees: An Analysis from the Signaling Model (November 2003). U of Alabama Economics Working Paper No. 02-06-02, Available at SSRN: https://ssrn.com/abstract=277149 or http://dx.doi.org/10.2139/ssrn.277149

Amy Farmer

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
501-575-6093 (Phone)
501-575-3241 (Fax)

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

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