Plaintiff attorneys on personal injury cases are typically paid a contingent fee. Contingent fees are widely believed to induce excessive litigation and are increasingly regulated. A theoretical analysis of contingent and hourly wage contracts shows that, with competition for cases, attorneys paid a contingent fee will devote the amount of effort that would be chosen by fully informed, risk-neutral plaintiffs paying by the hour: the net value of the claim to the plaintiff will be maximized. However, risk-averse plaintiffs will underinvest in the number of suits and amount spent per case, if attorneys must be paid by the hour. Estimates of the effects of limits on contingent fees are presented. If the benchmark of the optimum expenditure on litigation is that which would be chosen by fully informed, risk-neutral plaintiffs, the unconstrained contingent fee is likely to induce the closest approximation to this ideal.
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