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Two-way selection between flat-fee attorneys and litigants: theoretical and empirical analyses

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Abstract

Flat (or fixed) attorney fees, despite their popularity, have been rarely studied by theorists and empiricists. This article builds informal theoretical models to describe the incentive schemes of rational attorneys and rational litigants. Rational attorneys who collect flat fees in advance will work sufficiently hard on the cases at hand only to keep their reputation, and will decline representation less frequently than contingent-fee attorneys. Rational litigants would seek representation and select flat-fee attorneys mainly based on how well an attorney can increase the probability of winning. We create three unique survey data sets: one on attorneys with 834 observations; one on litigants with 2705 observations; and one on 1224 randomly selected adults—all in Taiwan. Empirical analyses of these data reveal that flat-fee attorneys in Taiwan turned down about 10% of potential clients, mainly because of low expected win rates. Such attorneys attract clients largely based on their reputation. Inexperienced litigants rely on their social network for information and attorney referrals. As litigants gain experience, they are more inclined to focus on factors that are more likely to maximize their net private benefits.

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Fig. 1

Source: Litigant survey data

Fig. 2

Source: Attorney survey data

Fig. 3

Source: Attorney survey data

Fig. 4

Source: Litigant survey data

Fig. 5
Fig. 6

Source: Litigant survey data

Fig. 7

Source: Litigant survey data

Fig. 8

Source: Litigant survey data

Fig. 9

Source: Attorney survey data

Fig. 10

Source: Attorney survey data

Fig. 11

Source: Attorney survey data

Notes

  1. 1.

    In most European countries, contingent fees are banned (Spier 2007: 308), and at least the fee-shifting part of the attorney fees is fixed, sometimes ex ante by a schedule, sometimes ex post by courts or other government officials (Pfennigstorf 1984: 57–61).

  2. 2.

    In Michelson (2006)’s description, Chinese attorneys charge most of the fees ex post; thus, many attorneys refuse cases with low fee potential.

  3. 3.

    As Dana and Spier (1993: 350) observe, concern for reputation aside, fixed-fee attorneys will not reveal to clients that the case has a low expected return.

  4. 4.

    In this section, the goal is to develop an informal theoretical model that falls under the rubric of the traditional neoclassical law and economics. One can certainly point out plausible psychological reasons why attorneys will decline cases that are likely to lose, such as “humans hate losing” and “humans like to be respected.” Nonetheless, they are not helpful for our models because we are trying to highlight the different behaviors of attorneys under flat fees, in comparison with those under contingent fees and hourly fees, and human attorneys under any fee system would hate losing and like to be respected. The point is that a losing record and a bad reputation have different economic implications under the three fee systems.

  5. 5.

    Kritzer and Krishnan (1999: 348–349) point out that contingent-fee attorneys also think in terms of long-term interests, and reputation is the most important factor in securing future business.

  6. 6.

    Kritzer (2008: 900–901) also notes that his empirical study reflects a kind of cost–benefit calculation that hinges on the likely benefit a lawyer would provide to her client.

  7. 7.

    More than 100 empirical studies have examined the effect of attorney experience, but Greiner and Pattanayak (2011: 2175–2184) have criticized those studies as lacking credence in causal inferences. Our hypothesis thus has not yet been supported by any causal empirical study.

  8. 8.

    In order to enhance the efficiency of estimation, we have also tried post-stratification weighting. Nonetheless, the variance of estimate for the post-stratification weights is 35%, much higher than that under raking weighting.

  9. 9.

    Regression results are essentially the same if we use unweighted data.

  10. 10.

    From interviews with dozens of attorneys in Taiwan, we know for sure that even plaintiff attorneys in personal injury cases and medical malpractice cases still charge flat fees. This is in striking contrast with the prevalent use of contingent fees in these types of cases and the common use of hourly fees in other types of cases (Kakalik and Pace 1986: 96; Dana and Spier 1993: 349).

  11. 11.

    E-mail exchange with Prof. Masayuki Murayama, a leading law and society scholar in Japan.

  12. 12.

    Beta regression models cannot be used because some attorneys reported that they never declined to represent any potential clients, and the dependent variable in beta regression cannot be 0.

  13. 13.

    Chen et al. (2015: 116), using data from Taiwan, also find that parties of higher status mobilize superior legal representation.

  14. 14.

    Murayama (2009a) also finds that educational levels do not affect decisions by Japanese litigants to retain attorneys.

  15. 15.

    We have run a logistic model with data containing only the first-timers. Individual income is still not statistically significant at the 10% level.

  16. 16.

    Kritzer (2008: 879) also find that problem type better predicts the decision to retain attorneys.

  17. 17.

    A caveat is in order. Our survey did not ask litigants whether they have hired an attorney before if they informed us that they retained an attorney in their case at hand. Thus, we cannot add a dummy variable to control for prior experience of retaining attorneys. Compare Murayama (2009b: 290), who find that Japanese litigants who had retained attorneys before were more likely to retain attorneys in the future.

  18. 18.

    Please compare with Huang (2008). Using official administrative data from 2000 to 2006, Huang (2008: 197) argues that "parties are quite apt to make deliberate and reasonable decisions on whether to seek legal representation in Taiwan and that the continental judge’s active role in the adjudication process helps to explain why pro se litigants fare reasonably well in formal litigation." Huang (2008: 197) also finds that "legal representation has no significant bearing on the case outcomes when the parties go to trial."

  19. 19.

    The prior literature, by contrast, tends to emphasize the importance of informal contacts (e.g., Ladinsky 1976: 219), perhaps because their data mainly capture inexperienced litigants.

  20. 20.

    In our telephone survey, 20 out of the 32 respondents (63%) also picked referral by relatives and friends as the most important source of information.

  21. 21.

    Compare Murayama (2009a: 171–172), reporting that Japanese litigants have to be “introduced” by a common friend to an attorney; attorneys are reluctant to represent walk-in clients.

  22. 22.

    Litigants of all education levels, regions, incomes, and ages considered referrals by relatives and friends to be the most important factors in choosing their attorneys. Unreported statistical tests show no statistically significant differences among these factors.

  23. 23.

    We asked surveyed attorneys to report the number of cases they handled each year and the percentage of potential clients they declined. Using these two numbers, we estimated the number of potential clients approaching each attorney. We replaced the (natural log of the number of represented cases) in the fractional regression (Table 6) with the (natural log of the estimated number of potential clients). This variable is statistically significant at the 0.1% level and has a positive sign. The judge dummy is insignificant at the 10% level, and the p value for (>15 years) practice experience is 0.051. This suggests that no matter whether an attorney has been a judge or not, one with more potential clients is likely to be more selective. We do not put this regression in the text because the key new variable is an estimate and the dependent variable was used to compute the key new variable.

  24. 24.

    Michelson (2006: 19) observes this phenomenon in China as well.

  25. 25.

    As Figure 10 shows, attorneys rarely worry about clients’ inability to afford fees.

  26. 26.

    Compare Kritzer and Krishnan (1999: 366), who point out that attorneys who refer cases to others are likely to be able to tell the quality of the referred person.

  27. 27.

    Compare Lochner (1975), who studies how intermediaries hook up solo practitioners with no-fee or low-fee clients.

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Acknowledgements

The authors thank two anonymous referees, Kong-pin Chen, Kan-Hsueh Chiang, Dawn Chutkow, Michael Heise, Han-wei Ho, William Hubbard, Chang-ching Lin, Pei-yu Lo, Masayuki Murayama, JJ Prescott, and Giovanni Ramello for helpful comments. Peter Chen, Yi-chen Chu, Min Yen Tai and Ting-chun Liu provided valuable research assistance.

Author’s contribution

Yun-chien Chang was responsible for co-designing the survey questionnaires, identifying the theoretical framework, conducting most of the empirical analysis, and most of the writing. Su-hao Tu was responsible for co-designing the survey questionnaires, supervising the telephone surveys, and weighting the observations. Both were involved in the coding process. This article uses data sets that were compiled when Yun-chien Chang conducted an empirical project commissioned by the Judicial Yuan of Taiwan.

Funding

Part of the funding for the project was provided by Institutum Iurisprudentiae, Academia Sinica.

Author information

Correspondence to Yun-chien Chang.

Additional information

Yun-chien Chang dedicates this work to the memory of Ted Eisenberg, teacher, mentor, co-author, and friend.

Disclaimer This article reflects the view of the authors, not that of the Judicial Yuan of Taiwan or any other government agencies or associations.

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Chang, Y., Tu, S. Two-way selection between flat-fee attorneys and litigants: theoretical and empirical analyses. Eur J Law Econ 49, 131–164 (2020). https://doi.org/10.1007/s10657-017-9566-3

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Keywords

  • Contingent fee
  • Hourly fee
  • Fixed fee
  • Litigation
  • Settlement
  • Attorney referral
  • Survey
  • Taiwan

JEL Classification

  • K41