Estimating the Degree of Experts Agency Problem: The Case of Medical Malpractice Lawyers

I empirically study the expert’s agency problem in the context of lawyers and their clients. Incentives of lawyers and clients are misaligned in dispute resolution under contingency fee arrangement with which lawyers receive a fraction of recovered payment as compensation while bearing the legal cost. Lawyers prefer to pursue a case less than their clients prefer as they incur all the legal costs and receive smaller fraction of payment. In this paper, I measure the degree to which lawyers work in the interest of their clients. To do so, I construct a bargaining model of dispute resolution that nests two special cases as well as their convex combinations in which lawyers work in their clients’best interests and in which they work in their own interests, and estimate the model using data of medical malpractice disputes. The timing of dropped cases identi…es the nesting parameter because cases are dropped more frequently and at earlier timings if lawyers work in their own interests. I …nd that lawyers work almost perfectly in their own interest. Then, I compute the cost of agency problem resulting from misaligned incentives by simulating the …rst-best outcome using the estimated model. Finally, I evaluate the impact of tort reform on contingency fee, and show that limitation of contingency fee lower the joint surplus further. Department of Management and Strategy, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208. Email: [email protected]