Working Paper No. 05-01
Attorney Fees in Repeated Relationships
Brad Graham and Jack Robles
We consider the optimal contract between a law firm and a corporate client involved in a repeated relationship. In contrast to the previous literature pertaining to one time interactions between clients and attorneys, we find that the contingent fee is not the best arrangement. Rather, we find the optimal contract to include an hourly fee equal to the law firm's opportunity cost, a lump sum, and a termination function. The lump sum payment is independent of the number of hours worked by the law firm and the outcome of the case. The repeated nature of the relationship along with the client's ability to replace the law firm at zero cost, allows the client to create a termination function that gives the law firm the probablility that the client will terminate the relationship after the current case. The combination of all three of these contractual elements induce the law firm to exert the optimal level of effort in the current case in order to continue the relationship and obtain the lump sum payment in future cases.
JEL classification: K0; L14