The Korean Journal of Economic Studies
Litigation Contests with Objective Merits of the Case: Unobservable Contingent Fee Contract
Pan Sang Kang (Seoul National University) and Dongwoo Lee (Southwestern University of Finance and Economics)Year 2020Vol. 68No. 4
We study litigation contests under the contingent fee and the legal expenses insurance regimes when (1) there are objective merits of the case and (2) the contingent fee contract is not observable to the rival party. We first show that the contract disclosure results in lower contingent fee, which decreases the total effort level. As a consequence, the litigants' expected payoffs increase where as the expected payoff of the plaintiff's lawyer decreases. We next provide a condition under which the plaintiff prefers the legal insurance regime over the contingent fee regime. Finally, we demonstrate that the contingent fee regime always induces a lower total effort level than the legal insurance regime.