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Contentious Contingent Fee Research

Why do plaintiffs with assets opt for contingent fees over hourly rates? Why are contingent fees so uniform? And if contingent fees are so attractive to plaintiffs, why haven't defendants demanded similar arrangements?

Israeli behavioral economists Eyal Zamir and Ilana Ritov released a working paper ten days ago which aims to answer these questions and more: Neither Saints nor Devils: A Behavioral Analysis of Attorneys' Contingent Fees. Zamir and Ritov rely on the results of experiments on both students and seasoned tort lawyers.

One interesting result: participants were willing to pay attorneys fees with twice the expected value of hourly rates in order to insulate themselves against any risk of loss. The authors explain these results by pointing the the phenomenon known to behavioral economists as "loss aversion." Because we intuitively hate losing what we have, the logic goes, we are willing to give up large prospective gains to turn a mixed gamble ("you win some, you lose some") into a pure positive gamble ("heads I win, tails let's call it even"). Thus, even affluent trial lawyers participating in the experiment as imaginary plaintiffs opted for contingent fee representation.

The other really interesting section of the paper addresses the question of why contingent fees are uniform across cases and attorneys: plaintiffs expect to pay just about 33% whether they have a great case or an iffy one, and whether they have a great lawyer or, well, an iffy one. Tort reformers are wont to cry "market failure" here, and not without some evidence.

But Zamir and Ritov offer an alternative explanation grounded, again, in behavioral economics: people become strongly attached to status quo practices, especially when bargaining is very costly. Does this uniform pricing mean that the market is inefficient? Maybe not! Zamir and Ritov offer an alternative hypothesis that I have been, frankly, trying to develop this spring myself:

[T]he standard rate endures in the market thanks to a process of assortive matching, that is, the process through which the plaintiffs with very strong cases contract with the very best lawyers, second-best cases are handled by second-best attorneys, and so forth.

If Zamir and Ritov are correct, then contingent fees don't actually have a market effect similar to price-fixing. Rather, the most effective lawyers get the highest effective hourly rates because they can attract the best cases.

I plan to explore the proposition that, conversely, the worst lawyers file the worst cases, more commonly known as nuisance suits. Do we have a separate, identifiable class of nuisance lawyers out there? That, it seems to me, is the right follow-up question.

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Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.