Contingent-Fees in Litigation and Settlement: Contracts under Asymmetric Information

This paper explores wether lawyers’ observable contracts to represent plaintiffs are beneficial for litigants and lawyers. To do so, we consider civil disputes where a plaintiff adopts a contingent-fee system for her lawyer and a defendant represents herself. We first assume a plaintiff and her lawyer announce publicly the amount of contingent-fees. Next, we assume the plaintiff and her lawyer do not announce publicly the value of contingent-fees. Comparing the observable-contract case to the unobservable-contract case, we show: (i) in the litigation stage, the one third of the award as contingent-fees is fair for the plaintiff and her lawyer; and (ii) in the settlement stage, when the plaintiff is the underdog, the known contingent-fee system makes settlement easier; otherwise the unknown contingent-fee system does.