The Influence of Lawyers and Fee Arrangements on Arbitration

This paper proposes a theoretical analysis of final-offer arbitration in which disputants may be represented by lawyers who can be paid by flat, contingent, or conditional fees. We derive the equilibrium lawyers' efforts to defend their clients and the equilibrium parties' proposals made to the arbitrator, and evaluate each payment mechanism's performance according to its ability to enhance effort and to promote convergence between the disputants' claims. Following these criteria, the contingent payment structure is shown to be the best regime, since it improves the client-lawyer relationship by enhancing the lawyer's incentives to provide effort, without altering the gap between the parties' positions in arbitration.