The Pricing Structure of Legal Services: Do Lawyers Offer What Clients Want?

Abstract

We analyze clients’ contract choices in auctions where Dutch law firms compete for standard cases such as labor disputes for individuals and collecting debts for businesses. In the auctions, lawyers can submit bids with any fee arrangement they prefer, including an hourly rate, a fixed fee, and a ‘mixed fee’: a time-capped fixed fee plus an hourly rate for any additional hours should the case take longer than expected. A game-theoretic analysis of this auction format reveals that clients should accept only fixed-fee bids in equilibrium. We estimate a simultaneous equation model that includes both the client’s and lawyers’ side. Qualitatively in line with our theoretical prediction, we find that clients strongly prefer fixed fees. Our results suggest that selecting a lawyer through an auction may benefit clients who face an incidental legal problem. More generally, our findings tentatively contradict lawyers’ often made argument that hourly rates are in a client’s best interest.