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Allocating Settlement Authority under a Contingent‐Fee Arrangement

A contingent‐fee contract improves a plaintiff’s bargaining position against a defendant by providing an incentive to the plaintiff’s lawyer. Setting the lawyer’s share of judgment high will induce more effort from the lawyer, while keeping the lawyer’s settlement share low will reduce the legal fees and the lawyer’s rent. When the plaintiff negotiates against a tough‐bargaining defendant, however, legal fee saving accrues mostly to the defendant through a lower settlement offer. To maximize her return from settlement, the plaintiff would want to delegate control to the lawyer and guarantee him a large rent. She would want to delegate especially when the lawyer is more expensive and the size of the claim is small, as in individual tort cases.