This paper explores how effectively delegates’ legal efforts are controlled by
contingent fees, as well as in what manner the size of contingent fees is
influenced by the plaintiffs’ liquidity constraints and degree of risk aversion. In
our court-contest model, defendants represent themselves while the plaintiffs
employ attorneys on a contingent-fee basis. Delegates receive a fixed fee
regardless of outcome, with a contingent fee receivable upon winning the
case. Results are obtained from a two-stage subgame model as follows. First,
delegates show a strategic behavior of concentrating on the cases with higher
winning probabilities while treating the rest with relative negligence, thus
implying that contingent fees may fall short of remedying the delegates’
insufficient legal efforts. Second, higher degree of risk-aversion gives rise to
larger contingent fees. Third, in accordance with differing shapes of
risk-aversion, plaintiffs’ liquidity constraints manifest opposite influences on the
size of contingent fees. That is, plaintiffs’ initial wealth raises contingent fees
in case risky assets are an inferior good, while the opposite holds in case of
a normal good.