Incentive Structures for Class Action Lawyers

Posted: 29 Feb 2008

See all articles by Alon Klement

Alon Klement

Buchman Faculty of Law, Tel Aviv University

Multiple version iconThere are 3 versions of this paper

Date Written: April 2004

Abstract

This article examines the way in which an attorney fee structure that maximizes the expected recovery for class members in a class action may be implemented in practice. Using a mechanism design approach, we demonstrate that if the court can observe the lawyer's effort, then the optimal payoff to the class may be realized using the lodestar method-a contingent hourly fee arrangement that is currently practiced in many class actions-but only if the hourly contingent fee is multiplied by a declining, as opposed to the practiced constant, multiplier. If the court cannot observe the lawyer's effort, then in some circumstances the optimal payoff to the class may still be realized by offering the lawyer a menu of fee schedules from which she has to choose one. Each fee schedule consists of a fixed percentage and a threshold amount below which the lawyer earns no fee, with the threshold increasing with the chosen percentage. The lawyer is paid the fixed percentage chosen only for amounts won above the threshold.

Suggested Citation

Klement, Alon, Incentive Structures for Class Action Lawyers (April 2004). The Journal of Law, Economics, and Organization, Vol. 20, Issue 1, pp. 102-124, 2004, Available at SSRN: https://ssrn.com/abstract=1095613 or http://dx.doi.org/10.1093/jleo/ewh025

Alon Klement (Contact Author)

Buchman Faculty of Law, Tel Aviv University ( email )

Tel Aviv
Israel

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