Abstract
We examine legal services contracts characterized by a contingency fee and an hours reporting requirement in a moral hazard setting. We find that hours reporting requirements in contingency contracts can reduce the rent needed to induce high attorney effort under moral hazard. Under certain conditions, the ability to set hours above the first-best level leads a client to choose a contract inducing high effort when she otherwise would not. The important condition of this result is, however, that hours must be contractible. We apply our model to the 2010 Florida “sunshine” law that requires hours reporting by private attorneys employed on a contingency fee basis by the attorney general. We find the sunshine laws of Florida and other states may, in addition to providing more transparency in government contracting, increase the public benefit from an attorney general’s employment of private attorneys.
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Notes
An exception is Garoupa and Gomez-Pomar (2008) who find the hourly fee preferable for interactions between clients and law firms involving a dual agency problem. The attorney, in this case, must balance the interests of the client and the law firm for which he works.
Polinsky and Rubinfeld (2003) consider a model where hours are observable in a mixed contract. In their model, attorneys receive compensation through a contingent fee and receive an additional payment from a third-party administrator that is a function of the attorney’s legal costs.
Fla. Stat. ch. 16.0155 (2010). Several other states have similar “sunshine” laws including Colorado, Connecticut, Kansas, Minnesota, Mississippi, North Dakota, Texas, and Virginia.
Attorneys are assumed to be of uniform quality. See Rubinfeld and Scotchmer (1993) for an analysis of contingent fees where attorneys differ in quality.
Since we assume the market for attorneys is competitive, our results would remain unchanged if we allowed clients to offer take-it-or-leave-it contracts to the attorney.
For models analyzing the impact of the fee structure on settlement, see, for example, Miceli (1994), Hay (1997), Polinsky and Rubinfeld (2002), and Helland and Tabarrok (2003). We also do not allow for renegotiation or contract breach. See Edlin and Reichelstein (1996) for a discussion of these issues when trading partners make relationship-specific investments.
If this were not the case, then, as we will see, contingent fees are unnecessary to induce the optimal level of effort.
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Acknowledgments
The authors wish to thank Paul Calcott for helpful discussions.
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Graham, B.J., Robles, J. Moral hazard and legal services contracts. Int Rev Econ 61, 219–230 (2014). https://doi.org/10.1007/s12232-014-0198-4
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DOI: https://doi.org/10.1007/s12232-014-0198-4