Playing it Safe with Low Conditional Fees Versus Being Insured by High Contingent Fees

Abstract

Under contingent fees, the attorney gets a share of the judgement; under conditional fees they get an upscale premium if the case is won, which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a framework where lawyers choose between a safe and a risky litigation strategy. Under conditional fees, lawyers prefer the safe strategy, under contingent fees the risky one. Risk-averse plaintiffs prefer conditional fees over contingent fees when lawyering costs are low and vice versa for high lawyering costs.

Keywords: Contingent fees, conditional fees, risk-aversion, insurance, incentives

JEL Classification: D82, K10