Equilibrium Contingent Fees with Heterogeneous Attorneys

Abstract

This paper provides a signaling model to analyze the equilibrium fee structures arising when attorneys are heterogeneous with regard to unobservable ability. Unlike fixed fees, contingent fees are more profitable to attorneys who have a greater probability of winning, and thus may serve as an ability signal. It is shown that pooling equilibria are the only equilibria when high-ability attorneys do not have sufficient capacity to serve all consumers. For all pooling equilibria (i) both high- and low-ability attorneys charge the same simple contingent percentage fee, and (ii) the highs operate at capacity while the lows have excess capacity. In some equilibria, positive profits are earned by both types of attorneys despite the excess capacity.