Risk-averse litigants' compensation package for their risk-neutral lawyers

What is it about?

Most litigants are risk-averse in the sense that they want to avoid uncertainty regarding the outcome of litigation. On the other hand, their lawyers are risk-neutral since they deal with many litigations at the same time. This paper examines the way the risk-averse litigants set their compensation package for their lawyers. The compensation package consists of a fixed fee and a contingent fee which is dependent on the outcome of the litigation. In this situation, to induce the lawyers to exert the optimal effort, the litigants set their compensation package strategically, i.e., they adjust the level of compensation fees, taking the other litigant's behavior into account.

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Why is it important?

Substantial amount of resources are spent on litigation in many countries. It is important to understand the mechanism by which the litigants determine their contracts with lawyers and outlays on litigation. The distribution of endowments of litigants also affects the process of litigation. The present paper examines the interaction between litigants and the effect of distribution of initial endowment on the legal contract between the litigant and the lawyer, and consequently on the social expenditure on litigation. The analysis of the present paper can shed some light on the way legal system works.

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