OPTIMAL CONTINGENT FEES IN A WORLD OF SETTLEMENT

This article examines the design of contingent fees for plaintiffs' la wyers in a legal system that gives parties the choice between going to trial and settling out of court. Using a simple principal-agent model with attorney moral hazard, the article shows that the client general ly benefits from a bifurcated fee structure in which the attorney gets a large fraction of the recovery in the event of trial but a small fr action in the event of settlement; this structure maximizes both the s ize of the recovery and the client's distributive share of it. The art icle also examines the limits on the use of this fee structure that ar e imposed by two aspects of the settlement bargaining process: (I) the allocation of settlement authority between lawyer and client, and (2) the relative bargaining power of plaintiff and defendant.