Contingent Fees and Litigation Settlement

Do contingent fees cause lawyers to settle cases sooner, and for less, than plaintiffs would choose? Or, can they benefit plaintiffs by inducing lawyers to push harder for high settlement offers? Both of these arguments feature prominently in policy debate surrounding contingent fees. The paper presents a two-period model of pre-trial bargaining with asymmetric information in order to examine the strategic effects of contingent fees and lawyer self-interest on settlement timing and the plaintiff's payoffs in litigation. The Perfect Bayesian Equilibrium strategies of a self-interested lawyer can induce early settlement with high offers. However, we identify two opposing tendencies which leave the overall effects on settlement timing ambiguous and plaintiffs often failing to benefit from this strategy.