Working Paper BETA #2018-17

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Title : On Lawyer Compensation When Appeals Are Possible

Author(s) : Christian At, Tim Friehe, Yannick Gabuthy

Abstract : This paper describes how plaintiff should compensate lawyers, who choose unobservable effort, when litigation may proceed from the trial to the appeals court. We find that, when it is very likely that the defendant will appeal, transfers made to the lawyer only after an appeals court’s ruling are key instruments in incentivizing both trial and appeal court effort. Indeed, the lawyer may not receive any transfer after the trial court’s ruling. In contrast, when reaching the appeals stage is unlikely, a favorable trial court ruling triggers a positive transfer to the lawyer and first-best appeals effort. In our setup, the lawyer may receive a lower transfer after winning in both the trial and the appeals court as compared to the scenario in which the first-instance court ruled against the plaintiff and the appeals court reversed that ruling.

Key-words : Litigation, Appeals, Moral hazard, Optimal contract.

JEL Classification : D82, K41.