"Private Contingent Fee Lawyers and Public Power: Constitutional and Political Implications": important paper (PDF) by Northwestern lawprof Martin Redish on the problematic ethical status of government hiring of private counsel for a share of the spoils. As the first and last paragraphs indicate, Prof. Redish's views are very akin to ours (footnotes omitted):
Imagine a system in which all police work is performed not by governmental employees but by private contractors who are paid by the arrest: the more arrests, the more money they receive. Can anyone seriously imagine that such a system would be either constitutional or in any way consistent with the values of the American political system? I think not. Now imagine a system in which prosecutors receive no set salary but instead are paid by the success of their prosecutions: the more convictions that are obtained, the more money they make. Once again, it is difficult to conceive that such a system would be held to satisfy the requirements of due process. When the coercive power of the state is asserted against private individuals or entities, our constitutional and political traditions are appropriately construed to demand that those exercising that power base their decisions and conduct on a good faith assessment of the public interest, rather than on considerations of narrow focus of personal self-interest. ....
If there is anything clear about the often murky state action doctrine, it is that what would be unconstitutional for the state to do itself cannot be somehow constitutionally laundered by delegating the very same authority to private actors operating under ultimate state control. Thus, if one accepts each of the steps of my political and constitutional analysis to this point, there can be little doubt that an arrangement in which private lawyers are hired on a contingent fee basis to perform litigation functions traditionally performed by state attorneys is, at the very least, politically improper. It is highly likely that it is unconstitutional as well.
P.S. Beck and Herrmann remind us that they rounded up a very good set of links and references on this subject last year.