Why law firms segregate litigation activities?: an incentive theory approach
Autor(a) principal: | |
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Data de Publicação: | 2024 |
Tipo de documento: | Dissertação |
Idioma: | eng |
Título da fonte: | Repositório Institucional do FGV (FGV Repositório Digital) |
Texto Completo: | https://hdl.handle.net/10438/35696 |
Resumo: | The economic literature on legal fee contracting has traditionally focused on studying incentives for litigation cases. However, this emphasis overlooks the crucial role lawyers play in structuring corporate transactions and drafting contractual agreements to safeguard economic and financial interests. Both litigation (court work) and consulting (transactional work) serve the common goal of legal protection through state enforcement, yet they differ significantly in their workflows. This paper applies the multitask moral hazard model of Holmstrom & Milgrom (1991) to explore how these differences influence law firms internal organisation and their business relationship with clients. In our model, a client (principal) seeks to minimise economic losses associated with legal issues, which can arise from court litigation or neglected legal contingencies in corporate transactions. The client hires a lawyer (agent) to handle both tasks simultaneously, incentivising the lawyer through a variable wage whose value depends on a signal received by the client after work is completed. Our model shows that, as the lawyer faces higher personal costs for effort, he tends to proportionally allocate more effort on the litigation task, in which outcomes are more directly observable and external feedback is more immediate and likely to happen compared to consulting. This allocation aligns with the idea that risk-averse agents prioritise tasks where their efforts yield clearer and more immediate results. In line with the observations of Holmstrom & Milgrom (1991), our analysis suggests that these incentive structures may explain why large law firms historically chose to separate their litigation and consulting departments. The clearer external feedback in litigation allows for stronger performance incentives, whereas the less measurable outcomes in consulting might demand a distinct incentive approach. |
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Silva, Matheus Henrique Recidivi eEscolas::EESPAzevedo, Paulo Furquim deFernandes, MarceloMonte, DanielCosta, Raone Botteon2024-08-07T16:23:53Z2024-08-07T16:23:53Z2024-06-02https://hdl.handle.net/10438/35696The economic literature on legal fee contracting has traditionally focused on studying incentives for litigation cases. However, this emphasis overlooks the crucial role lawyers play in structuring corporate transactions and drafting contractual agreements to safeguard economic and financial interests. Both litigation (court work) and consulting (transactional work) serve the common goal of legal protection through state enforcement, yet they differ significantly in their workflows. This paper applies the multitask moral hazard model of Holmstrom & Milgrom (1991) to explore how these differences influence law firms internal organisation and their business relationship with clients. In our model, a client (principal) seeks to minimise economic losses associated with legal issues, which can arise from court litigation or neglected legal contingencies in corporate transactions. The client hires a lawyer (agent) to handle both tasks simultaneously, incentivising the lawyer through a variable wage whose value depends on a signal received by the client after work is completed. Our model shows that, as the lawyer faces higher personal costs for effort, he tends to proportionally allocate more effort on the litigation task, in which outcomes are more directly observable and external feedback is more immediate and likely to happen compared to consulting. This allocation aligns with the idea that risk-averse agents prioritise tasks where their efforts yield clearer and more immediate results. In line with the observations of Holmstrom & Milgrom (1991), our analysis suggests that these incentive structures may explain why large law firms historically chose to separate their litigation and consulting departments. The clearer external feedback in litigation allows for stronger performance incentives, whereas the less measurable outcomes in consulting might demand a distinct incentive approach.A literatura econômica sobre honorários advocatícios tradicionalmente direcionou a sua atenção ao estudo de incentivos para demandas contenciosas. No entanto, essa ênfase negligencia o papel crucial de advogados na estruturação de operações de mercado e na elaboração de instrumentos contratuais visando à proteção de interesses econômicos e financeiros. Tanto o trabalho consultivo quanto contencioso têm o objetivo comum de proteção jurídica por meio da coerção estatal, mas diferem significativamente quanto aos seus fluxos de trabalho. Este artigo aplica o modelo de risco moral multitarefas de Holmstrom e Milgrom (1991) para explorar como essas diferenças influenciam a organização interna dos escritórios de advocacia e sua relação comercial com os clientes. Em nosso modelo, um cliente (principal) busca minimizar perdas econômicas associadas a problemas jurídicos, que podem surgir de litígios judiciais ou de contingências jurídicas negligenciadas em operações de mercado. O cliente contrata um advogado (agente) para trabalhar simultaneamente em ambas as tarefas, incentivando o seu esforço por meio de uma remuneração variável cujo valor depende de um sinal recebido pelo cliente após a conclusão do trabalho. Nosso modelo mostra que, à medida que o advogado enfrenta custos pessoais mais altos para exercer esforço nos casos, tenderá a dedicar mais esforço, proporcionalmente, à tarefa litigiosa, cujos resultados são mais observáveis com mais clareza e a avaliação externa é mais imediato e provável em comparação com o trabalho consultivo. Essa alocação está alinhada com a ideia de que agentes avessos ao risco priorizam tarefas onde seus esforços produzem resultados mais claros e imediatos. Em conformidade com as observações de Holmstrom e Milgrom (1991), nossa análise sugere que essas estruturas de incentivos podem explicar por que grandes escritórios de advocacia historicamente optaram por segregar suas práticas consultivas e contenciosas. A avaliação externa mais precisa na prática contenciosa permite a aplicação de incentivos por desempenho mais agressivos, enquanto os resultados menos observáveis no trabalho consultivo podem exigir uma abordagem remuneratória diferenciada.engEconomicsMicroeconomicsContractsLawyers - Legal feesEconomiaMicroeconomiaContratosAdvogados - HonoráriosEconomiaEconomiaMicroeconomiaContratosAdvogados - HonoráriosWhy law firms segregate litigation activities?: an incentive theory approachinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/masterThesisinfo:eu-repo/semantics/openAccessreponame:Repositório Institucional do FGV (FGV Repositório Digital)instname:Fundação Getulio Vargas (FGV)instacron:FGVLICENSElicense.txtlicense.txttext/plain; charset=utf-85112https://repositorio.fgv.br/bitstreams/df87053d-8403-469a-8de3-b7edf75107df/download2a4b67231f701c416a809246e7a10077MD52ORIGINAL2024_06_ 08___Dissertação__final.pdf2024_06_ 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|
dc.title.eng.fl_str_mv |
Why law firms segregate litigation activities?: an incentive theory approach |
title |
Why law firms segregate litigation activities?: an incentive theory approach |
spellingShingle |
Why law firms segregate litigation activities?: an incentive theory approach Silva, Matheus Henrique Recidivi e Economics Microeconomics Contracts Lawyers - Legal fees Economia Microeconomia Contratos Advogados - Honorários Economia Economia Microeconomia Contratos Advogados - Honorários |
title_short |
Why law firms segregate litigation activities?: an incentive theory approach |
title_full |
Why law firms segregate litigation activities?: an incentive theory approach |
title_fullStr |
Why law firms segregate litigation activities?: an incentive theory approach |
title_full_unstemmed |
Why law firms segregate litigation activities?: an incentive theory approach |
title_sort |
Why law firms segregate litigation activities?: an incentive theory approach |
author |
Silva, Matheus Henrique Recidivi e |
author_facet |
Silva, Matheus Henrique Recidivi e |
author_role |
author |
dc.contributor.unidadefgv.por.fl_str_mv |
Escolas::EESP |
dc.contributor.member.none.fl_str_mv |
Azevedo, Paulo Furquim de |
dc.contributor.author.fl_str_mv |
Silva, Matheus Henrique Recidivi e |
dc.contributor.advisor1.fl_str_mv |
Fernandes, Marcelo Monte, Daniel Costa, Raone Botteon |
contributor_str_mv |
Fernandes, Marcelo Monte, Daniel Costa, Raone Botteon |
dc.subject.eng.fl_str_mv |
Economics Microeconomics Contracts Lawyers - Legal fees |
topic |
Economics Microeconomics Contracts Lawyers - Legal fees Economia Microeconomia Contratos Advogados - Honorários Economia Economia Microeconomia Contratos Advogados - Honorários |
dc.subject.por.fl_str_mv |
Economia Microeconomia Contratos Advogados - Honorários |
dc.subject.area.por.fl_str_mv |
Economia |
dc.subject.bibliodata.por.fl_str_mv |
Economia Microeconomia Contratos Advogados - Honorários |
description |
The economic literature on legal fee contracting has traditionally focused on studying incentives for litigation cases. However, this emphasis overlooks the crucial role lawyers play in structuring corporate transactions and drafting contractual agreements to safeguard economic and financial interests. Both litigation (court work) and consulting (transactional work) serve the common goal of legal protection through state enforcement, yet they differ significantly in their workflows. This paper applies the multitask moral hazard model of Holmstrom & Milgrom (1991) to explore how these differences influence law firms internal organisation and their business relationship with clients. In our model, a client (principal) seeks to minimise economic losses associated with legal issues, which can arise from court litigation or neglected legal contingencies in corporate transactions. The client hires a lawyer (agent) to handle both tasks simultaneously, incentivising the lawyer through a variable wage whose value depends on a signal received by the client after work is completed. Our model shows that, as the lawyer faces higher personal costs for effort, he tends to proportionally allocate more effort on the litigation task, in which outcomes are more directly observable and external feedback is more immediate and likely to happen compared to consulting. This allocation aligns with the idea that risk-averse agents prioritise tasks where their efforts yield clearer and more immediate results. In line with the observations of Holmstrom & Milgrom (1991), our analysis suggests that these incentive structures may explain why large law firms historically chose to separate their litigation and consulting departments. The clearer external feedback in litigation allows for stronger performance incentives, whereas the less measurable outcomes in consulting might demand a distinct incentive approach. |
publishDate |
2024 |
dc.date.accessioned.fl_str_mv |
2024-08-07T16:23:53Z |
dc.date.available.fl_str_mv |
2024-08-07T16:23:53Z |
dc.date.issued.fl_str_mv |
2024-06-02 |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/masterThesis |
format |
masterThesis |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
https://hdl.handle.net/10438/35696 |
url |
https://hdl.handle.net/10438/35696 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.source.none.fl_str_mv |
reponame:Repositório Institucional do FGV (FGV Repositório Digital) instname:Fundação Getulio Vargas (FGV) instacron:FGV |
instname_str |
Fundação Getulio Vargas (FGV) |
instacron_str |
FGV |
institution |
FGV |
reponame_str |
Repositório Institucional do FGV (FGV Repositório Digital) |
collection |
Repositório Institucional do FGV (FGV Repositório Digital) |
bitstream.url.fl_str_mv |
https://repositorio.fgv.br/bitstreams/df87053d-8403-469a-8de3-b7edf75107df/download https://repositorio.fgv.br/bitstreams/5407119e-8729-4e52-89c9-52b4a0d88e92/download https://repositorio.fgv.br/bitstreams/bc4ea170-ab50-4605-add7-b7e326f406ab/download https://repositorio.fgv.br/bitstreams/1f1531c4-7cc9-41ae-90ff-4887805d0624/download |
bitstream.checksum.fl_str_mv |
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bitstream.checksumAlgorithm.fl_str_mv |
MD5 MD5 MD5 MD5 |
repository.name.fl_str_mv |
Repositório Institucional do FGV (FGV Repositório Digital) - Fundação Getulio Vargas (FGV) |
repository.mail.fl_str_mv |
|
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1810023629599014912 |