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Journal of Law, Economics, and Organization Advance Access published online on December 6, 2007
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewm063
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© The Author 2007. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

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

Nuno Garoupa*

University of Illinois College of Law & University of Manchester School of Law

Fernando Gomez-Pomar**

Universitat Pompeu Fabra

* University of Illinois College of Law, 504 E Pennsylvania Avenue, Champaign, IL 61820, USA. Email: ngaroupa{at}law.uiuc.edu.

** Department de Dret, Universitat Pompeu Fabra, Carrer Ramon Trias Fargas 25-27, 08005 Barcelona, Spain. Email: fernando.gomez{at}upf.edu.

Large law firms seem to prefer hourly fees over contingent fees. This article provides a moral hazard explanation for this pattern of behavior. Contingent legal fees tend to 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 a common agency problem. The article also discusses other possible explanations.


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