A personal-injury lawyer works as an agent for his injured plaintiff. The expected award from the trial (taking into account the plaintiff’s probability of prevailing and the damage award if she prevails) is l,where l is the lawyer’s effort. Effort costs the lawyer l2/2.
a. What is the lawyer’s effort, his surplus, and the plaintiff’s surplus in equilibrium when the lawyerobtains the customary 1 / 3 contingency fee (that is, the lawyer gets 1 / 3 of the award if theplaintiff prevails)?
b. Repeat part (a) for a general contingency fee of c.
c. What is the optimal contingency fee from the plaintiff’s perspective? Compute the associated surpluses for the lawyer and plaintiff.
d. What would be the optimal contingency fee from the plaintiff ’s perspective if she could “sell” the case to her lawyer [that is, if she could ask him for an up-front payment in return for a specified contingency fee, possibly higher than in part (c)]? Compute the up-front payment (assuming that the plaintiff makes the offer to the lawyer) and the associated surpluses for the lawyer and plaintiff. Do they do better in this part than in part (c)? Why do you think selling cases in this way is outlawed in many countries?
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