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Incentive Structures for Class Action Lawyers

Incentive Structures for Class Action Lawyers This article examines the way in which an attorney fee structure that maximizes the expected recovery for class members in a class action may be implemented in practice. Using a mechanism design approach, we demonstrate that if the court can observe the lawyer's effort, then the optimal payoff to the class may be realized using the lodestar method—a contingent hourly fee arrangement that is currently practiced in many class actions—but only if the hourly contingent fee is multiplied by a declining, as opposed to the practiced constant, multiplier. If the court cannot observe the lawyer's effort, then in some circumstances the optimal payoff to the class may still be realized by offering the lawyer a menu of fee schedules from which she has to choose one. Each fee schedule consists of a fixed percentage and a threshold amount below which the lawyer earns no fee, with the threshold increasing with the chosen percentage. The lawyer is paid the fixed percentage chosen only for amounts won above the threshold. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Law, Economics, and Organization Oxford University Press

Incentive Structures for Class Action Lawyers

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References (37)

Publisher
Oxford University Press
Copyright
The Journal of Law, Economics, & Organization, Vol. 20, No. 1, © Oxford University Press 2004; all rights reserved.
ISSN
8756-6222
eISSN
1465-7341
DOI
10.1093/jleo/ewh025
Publisher site
See Article on Publisher Site

Abstract

This article examines the way in which an attorney fee structure that maximizes the expected recovery for class members in a class action may be implemented in practice. Using a mechanism design approach, we demonstrate that if the court can observe the lawyer's effort, then the optimal payoff to the class may be realized using the lodestar method—a contingent hourly fee arrangement that is currently practiced in many class actions—but only if the hourly contingent fee is multiplied by a declining, as opposed to the practiced constant, multiplier. If the court cannot observe the lawyer's effort, then in some circumstances the optimal payoff to the class may still be realized by offering the lawyer a menu of fee schedules from which she has to choose one. Each fee schedule consists of a fixed percentage and a threshold amount below which the lawyer earns no fee, with the threshold increasing with the chosen percentage. The lawyer is paid the fixed percentage chosen only for amounts won above the threshold.

Journal

The Journal of Law, Economics, and OrganizationOxford University Press

Published: Apr 1, 2004

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