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https://hdl.handle.net/2142/70794
Description
Title
Optimal Contracts for Legal Services
Author(s)
Woj, Carolyn Anne
Issue Date
1987
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Abstract
This dissertation characterizes optimal contracts for legal services in the presence of asymmetric information. The lawyer-client relationship examined is an application of the general principal-agent problem. The agent (lawyer) takes an action that, together with the realization of a random variable (merit), determines the outcome of the case (settlement value). The merit of the case refers to the actual facts present in the client's case and how they relate to the relevant case law. A conflict of interest arises because the action is a productive input that involves disutility to the lawyer.
The lawyer-client relationship examined is different than the usual principal-agent problem because I assume that the lawyer observes the actual value of the random variable prior to choosing his action. The problem is thus one of self-selection; the principal must provide the agent with an incentive to reveal private information. The purpose of the optimal fee contract in this situation is to provide the lawyer with an incentive to (1) work in the client's best interest, and (2) reveal the actual merit of the case.
In determining the properties of the optimal contract, the timing of the information asymmetry and any ex post limitations on the liability of the lawyer are important factors. Optimal contracts in the presence of asymmetric information are either efficient or inefficient, depending on the type of asymmetric information present. If efficient contracts can induce self-selection while keeping the individual rationality constraint binding, efficient contracts are optimal. Otherwise, it is optimal for the principal to design contracts which induce inefficient outcomes, so that the payment necessary to induce self-selection can be reduced. Of special interest is the fact that the common fee forms (flat fee, hourly wage, and contingent fee) are not efficient or optimal, regardless of the informational structure present.
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