Attorneys' Compensation in Litigation with Bilateral Delegation

We study litigation between a plaintiff and a defendant in which each litigant hires an attorney who expends his effort on her behalf, and the attorneys' effort is not verifiable to a third party. We examine the equilibrium fixed fees and contingent fees for the attorneys in two legal systems: the system with the nonnegative-fixed-fee constraint and the system with the contingent-fee cap. We show that the fixed fees are always zero in the former legal system, and the contingent fees are always equal to the cap in the latter legal system. We examine also the equilibrium expected payoffs for the attorneys and those for the litigants in the two systems. By comparing these expected payoffs, we show that the attorneys prefer the system with the nonnegative-fixed-fee constraint, while the litigants prefer the system with the contingent-fee cap.