| dc.description.abstract | We model the game between an informed seller (a lawyer) and an uninformed buyer (a potential client) over the choice of compensation for the lawyer to take a case to trial, when there is post-contracting investment by the lawyer (effort at trial) that involves moral hazard. Clients incur a one-time search cost to contact a lawyer, which parametrically influences the monopoly power of the lawyer when he makes a demand of the client for compensation for his service. The client uses the demand to decide whether to contract with the lawyer or to visit a second lawyer so as to seek a second opinion, which incurs a second search cost. Seeking a second opinion shifts the bargaining power to the client by causing the lawyers to bid for the right to represent the client. We allow for endogenously-determined contingent fees alone (that is, the lawyer covers all costs and obtains a percentage of any amount won at trial) or endogenously-determined contingent fees and transfers; in this latter analysis, lawyers could buy the client's case. Under asymmetric information with only a contingent fee, in equilibrium the first lawyer visited demands a higher contingent fee for lower-valued cases, signaling the case's value to the client. If a transfer is also allowed, then in equilibrium the higher contingent fee (and transfer from the lawyer to the client) is obtained by the more valuable case, with only the highest-value case resulting in the lawyer buying the entire case (100% contingent fee with a transfer); again, in equilibrium, the value of the case is signaled. In both settings the client uses an equilibrium strategy that involves seeking a second opinion a fraction of the time, which induces separation. In equilibrium the presence of asymmetric information does not affect the client's expected payoff, but it does reduce the lawyer√¢s expected payoff and it does increase moral-hazard-induced inefficiency on the part of the lawyer in the post-contracting investment. | |
