Allocating Settlement Authority Under a Contingent-Fee Arrangement

Abstract

A contingent fee contract improves a plaintiff's bargaining position against a defendant by providing incentive to the plaintiff's lawyer. Setting the lawyer's share of judgment high will induce more effort from the lawyer while keeping the lawyer's settlement share low will reduce the legal fees and the lawyer's rent. When the plaintiff negotiates against a tough-bargaining defendant, however, legal fee saving accrues mostly to the defendant through a lower settlement offer. To maximize her return from settlement, the plaintiff would want to delegate control to the lawyer, even though this leaves the lawyer a sizable rent. Delegation is most effective 1) when the lawyer is most expensive and 2) the size of the case is small, as in individual tort cases.

Keywords: litigation, contingent fee, delegation

JEL Classification: K12, K13, K41