Incentive Structures for Class Action Lawyers

32 Pages Posted: 21 Jul 2001

See all articles by Alon Klement

Alon Klement

Buchman Faculty of Law, Tel Aviv University

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 2001

Abstract

Unlike ordinary litigation where courts rarely interfere with litigants' contractual relations with their lawyers or intervene in settlement decisions, in class actions courts are required to do both. We focus on one explanation for the court's presumed inability to secure just and fair treatment for class members, namely, the court's inferior information vis-a-vis the class attorney concerning the case's merit or probability of success. Using a mechanism design approach, we identify the maximum expected payoff that a class may obtain when the court cannot observe the case's merit. We demonstrate that when the court can observe the lawyer's effort (the number of hours she spent on the case), the optimal payoff can be realized using the lodestar method - a contingent hourly fee arrangement that is currently practiced in many class actions. When the court cannot observe the lawyer's effort, it can still guarantee the same (optimal) expected payment to the class with a menu of percentage fee contracts each consisting of a percentage and a threshold amount below which the lawyer earns no fee, with the threshold increasing with the chosen percentage.

Keywords: Class action, attorney fees, lodestar, percentage fees, contingent fees, litigation

JEL Classification: D82, K41

Suggested Citation

Klement, Alon and Neeman, Zvika, Incentive Structures for Class Action Lawyers (June 2001). Harvard Law and Economics Discussion Paper No. 329. Available at SSRN: https://ssrn.com/abstract=277429 or http://dx.doi.org/10.2139/ssrn.277429

Alon Klement (Contact Author)

Buchman Faculty of Law, Tel Aviv University ( email )

Tel Aviv
Israel

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~zvika/

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-3184 (Phone)
617-353-4449 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
235
rank
125,283
Abstract Views
1,367
PlumX Metrics