Contingent-Fee in Litigation with Dependent Preferences

We explore whether an attorney’s legal effort is effectively controlled by a contingent fee. To do so, we model a litigation in which a plaintiff hires his attorney to award damages, and a defendant has either in-house legal advice or an attorney on retainer. The attorney who works for the plaintiff with a contingent fee has endogenous dependent preferences. First, we examine the equilibrium legal effort and the equilibrium dependent preferences of the attorney in litigation. We find that the attorney shows a strategic behavior of increasing her legal effort with higher winning probabilities. Second, we examine the equilibrium contingent fees for the attorney in litigation. We find that the plaintiff should increase the contingent fee in accordance with the attorney’s strategic behavior.