Cashing by the Hour: Why Large Law Firms Prefer Hourly Fees Over Contingent Fees

Nuno Garoupa , University of Illinois
Fernando Gomez, Universitat Pompeu Fabra

Abstract

Large law firms seem to prefer hourly fees over contingent fees. This paper provides a moral hazard explanation for this pattern of behavior. Contingent legal fees align the interests of the attorney with those of the client, but not necessarily with those of the partnership. We show that the choice of hourly fees is a solution to an agency problem with multiple principals, where the interests of one principal (law firm) collide with the interests of the other principal (client).