Auctioning Class Action Representation
28 Pages Posted: 15 Feb 2019 Last revised: 18 May 2021
Date Written: May 18, 2021
Class actions feature severe agency problems, resulting from the divergence of interests between class members and the class attorney. This paper proposes a novel mechanism for selecting the class attorney and aligning her interests with those of the represented class. The mechanism applies a combined percentage and hourly litigation fee structure, suggested by Polinsky and Rubinfeld (2003), in which lawyers earn a percentage of the class’ common fund, and bear the same percentage over their time investment. To guarantee a maximum expected payoff for the class, we supplement this fee structure with a preliminary two stages auction, in which the role of the lawyer is tendered using competitive bidding. We prove that the proposed auction would leave the class with the highest possible net payoff. The percentage taken by the lawyer would be the lowest possible, and the winning lawyer would be the one who produces the highest expected net payoff for the class. We then extend the model to cases where the attorney files the class action is compensated for her pre-filing investment, and to settlements.
Keywords: Class Action, Litigation Funding, Insurance, Auction, Agency Problem
JEL Classification: K41, D44, K20
Suggested Citation: Suggested Citation