Incentive Structures for Class Action Lawyers

Posted: 17 Nov 2003

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

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Abstract

This paper examines the way in which an attorney fee structure that maximizes the expected recovery for class members in a class action may be implemented in practice. Using a mechanism design approach we demonstrate that if the court can observe the lawyer's effort, then the optimal payoff to the class may be realized using the lodestar method - a contingent hourly fee arrangement which is currently practiced in many class actions - but only if the hourly contingent fee is multiplied by a declining, as opposed to the practiced constant, multiplier. If the court cannot observe the lawyer's effort, then in some circumstances, the optimal payoff to the class may still be realized by offering the lawyer a menu of fee schedules from which she has to choose one. Each fee schedule consists of a fixed percentage and a threshold amount below which the lawyer earns no fee, with the threshold increasing with the chosen percentage. The lawyer is paid the fixed percentage chosen only for amounts won above the threshold.

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. The Journal of Law, Economics, and Organization, Vol. 20, No.1, pp. 102-124, 2004. Available at SSRN: https://ssrn.com/abstract=469883

Alon Klement

Buchman Faculty of Law, Tel Aviv University ( email )

Tel Aviv
Israel

Zvika Neeman (Contact Author)

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)

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