Contingent fee

Abstract: The intensity of enforcement efforts by securities regulators varies widely among financially developed nations, but countries with "common law origins" appear to systematically expend more on securities regulation than countries with "civil law origins." However, whether this variable of relative enforcement intensity explains the greater financial development of countries with common law origins or is instead the product of that differential in development remains open to question and depends on the direction of causality. This paper examines several explanations and prefers the hypothesis that enforcement intensity is a product of the level of retail ownership in the jurisdiction, with a high level of retail ownership creating a political demand for greater enforcement. Even more striking than this disparity between "common law" and "civil law" countries, however, is the outlier position of the United States, whose public and private enforcement efforts dwarf those of other nations. The United States is unique not in its expenditures on securities regulation, but in the amount and severity of the penalties it imposes. Enforcement efforts can be sensibly measured either in terms of "inputs" (i.e., budget and staff size) or outputs (i.e., enforcement actions brought or financial sanctions levied). After adjustment for market size or GDP, the U.S. does not differ materially from other common law countries in its expenditures, but it brings far more enforcement actions and imposes far greater financial penalties. For example, in 2005/06, the financial penalties imposed by the SEC exceeded those imposed by the U.K.'s Financial Services Agency ("FSA") by a thirty to one ratio, which, even after adjustment for differences in market capitalization, still translates into a ten to one ratio. The greater emphasis on enforcement in the United States is also evident in a comparison of the budgets of the major securities regulators, with the SEC devoting a percentage of its budget to enforcement that more than doubles that of the FSA. Behind this varying emphasis on enforcement may lie different approaches to regulation: an "ex ante" advisory and consulting approach elsewhere and an "ex post," deterrence-oriented emphasis in the United States. The greater use of public enforcement in the United States is more than paralleled by corresponding disparities in private enforcement and the use of the criminal sanction. Virtually alone, the United States recognizes the class action and the contingent fee. The actual financial sanctions imposed by private enforcement in the United States exceed those imposed by public enforcement, and the margin appears to be increasing. The only nation to rival the U.S. among "common law origin" countries is Australia, which actually devotes a higher percentage of its securities regulator's budget to enforcement and also uses the criminal sanction heavily. Australia is also characterized by a high level of retail ownership. What has been the consequence of this greater emphasis on enforcement in the United States? Much recent commentary has suggested that it has deterred foreign issuers from entering the U.S. and threatened U.S. capital market competitiveness. Closer examination suggests, however, that the firms most deterred from cross-listing have been firms with controlling shareholders and a pattern of extracting high private benefits of control. Foreign issuers that do cross-list in the United States incur a cost of capital reduction averaging 13% and a valuation premium (measured in terms of Tobin's q) that is 32% greater than that of non-cross-listing firms. Although the cross-listing decision involves a complex interaction of bonding, signaling, self-selection, and reduced informational asymmetry, the overall evidence supports the "bonding hypothesis" and suggests that U.S.'s greater emphasis on enforcement reduces informational asymmetry and gives it a lower cost of equity capital.

Abstract: mark up in different types of case, is to be issued after consultation with professional bodies. American style share contracts, whereby the lawyer is paid a proportion of the award if the case is won and nothing if it is lost, will continue to be unenforceable at law and prohibited by the professional bodies. The introduction of contingency fees in England and Wales has been discussed in a number of official and semi-official reports without any consensus emerging.3 We use a formal model of the litigation process to analyse the implications of contingent fees under both English and United States cost shifting rules. In the model potential defendants can take care to avoid accidents which impose losses on potential plaintiffs. If an accident occurs the defendant is sued by the plaintiff and makes a settlement offer. If the plaintiff rejects the offer the case proceeds to trial. Plaintiffs who win at trial are awarded damages and, under English rules, costs against the defendant. Lawyer-client contracts can be evaluated by the extent to which they (a) compensate plaintiffs after an accident by making it easy to sue and obtain redress, (b) induce settlements rather than costly trials and (c) provide

Abstract: The potential conflict of interest between lawyers and clients is well known. If a lawyer is paid for his time regardless of the outcome of the case, the lawyer may wish to bring the case even when it is not in the best interest of the client, may spend more hours working on the case than the client would want, and may reject a settlement when the client would be better off if it were accepted. Alternatively, if the lawyer is compensated according to the conventional contingent fee arrangement - under which he is paid a fraction of any trial award or settlement but bears all of the cost of litigation - the lawyer may have an insufficient incentive to bring the case, may spend too little time working on it if it is brought, and may encourage a settlement when the client would be better off going to trial. In this article we propose a method of compensating lawyers that overcomes the conflict of interest between the lawyer and the client. Our system is a variation of the conventional contingent fee system, but, in contrast to that system, we would have the lawyer bear only a fraction of the cost of litigation - the same fraction that the lawyer obtains of the award or settlement. We demonstrate that when the fraction of the cost that the lawyer bears equals the fraction of the award or settlement that he obtains, he will have an incentive to do exactly what a knowledgeable client would want him to do with respect to accepting the case, spending time on the case, and settling the case. Under our modified contingent fee system, a third party would compensate the lawyer for a certain fraction of his costs, in return for which the lawyer would pay that party an up-front fee. In this way, the client would not bear any costs, even if the case is lost, just as under the conventional contingent fee system.

Abstract: August 2001 Aligning the Interests of Lawyers and Clients A. Mitchell Polinsky and Daniel L. Rubinfeld * Abstract: The potential conflict of interest between lawyers and clients is well known. If a lawyer is paid for his time regardless of the outcome of the case, the lawyer may wish to bring the case even when it is not in the best interest of the client, may spend more hours working on the case than the client would want, and may reject a settlement when the client would be better off if it were accepted. Alternatively, if the lawyer is compensated according to the conventional contingent fee arrangement — under which he is paid a fraction of any trial award or settlement but bears all of the cost of litigation — the lawyer may have an insufficient incentive to bring the case, may spend too little time working on it if it is brought, and may encourage a settlement when the client would be better off going to trial. In this article we propose a method of compensating lawyers that overcomes the conflict of interest between the lawyer and the client. Our system is a variation of the conventional contingent fee system, but, in contrast to that system, we would have the lawyer bear only a fraction of the cost of litigation — the same fraction that the lawyer obtains of the award or settlement. We demonstrate that when the fraction of the cost that the lawyer bears equals the fraction of the award or settlement that he obtains, he will have an incentive to do exactly what a knowledgeable client would want him to do with respect to accepting the case, spending time on the case, and settling the case. Under our modified contingent fee system, a third party would compensate the lawyer for a certain fraction of his costs, in return for which the lawyer would pay that party an up-front fee. In this way, the client would not bear any costs, even if the case is lost, just as under the conventional contingent fee system. Stanford University and National Bureau of Economic Research; and University of California, Berkeley, respectively. Polinsky's research was supported by the John M. Olin Program in Law and Economics at Stanford Law School. Rubinfeld's research was undertaken in part while he was a visitor at New York University Law School. We received helpful comments from Joseph Bankman, Kevin Clermont, Douglas Cumming, Andrew Daughety, Winand Emons, Frank Easterbrook, Nuno Garoupa, Robert Hall, Jennifer Reinganum, Steven Shavell, and Kathryn Spier.