Fees, Reputation, and Information Production in the Credit Rating Industry

We compare a credit rating agency’s incentives to acquire costly information when it is only paid for giving favorable ratings to the corresponding incentives when the agency is paid up-front, i.e., irrespective of the ratings assigned. We show that, in the presence of moral hazard, contingent fees provide stronger dynamic incentives to acquire information than up-front fees and may induce higher social welfare. When the fee structure is chosen by the agency, contingent fees arise as an equilibrium outcome, in line with the way the market for credit rating actually works. (JEL D21, D82, D83, G24)

In-house deals: Agency and information asymmetry perspectives

Mergers and Acquisitions (M&A) advisors add value by overcoming the information asymmetries between acquirers and targets, but may also push bad deals through due to incentive misalignment stemming from contingent fees. In-house deals are those acquisitions with in-house advisors. We examine the wealth effect of M&A deals advised by in-house advisors versus outside advisors. About 15% of acquisitions are done via in-house advisors. In-house deals result in higher CARs to targets, insignificant wealth effects to acquirers, but lower cumulative abnormal combined returns. This finding is consistent with the view that the information asymmetry problem is more severe than the agency conflict in non-financial acquisitions. Thus, targets are more likely to extract wealth away from the acquirers, or the overall deal quality is lower. Also, consistent with the view that investment banks have an incentive to see deals completed, the completion rate is higher for deals with an outside advisor

Revenue from matching platforms

We consider the pricing problem of a platform that matches heterogeneous agents using match‐contingent fees. Absent prices, agents on the short side of such markets capture relatively greater surplus than those on the long side (Ashlagi et al. 2017). Nevertheless we show that the platform need not bias its price allocation toward either side. With independently drawn preferences, optimal price allocation decisions are independent of market size or imbalance; furthermore, changes in the optimal price level move both sides' prices in the same direction. In contrast, preference homogeneity biases price allocation in a direction that depends on the form of homogeneity; furthermore, changes in market imbalance move both sides' prices in opposite directions. These effects arise due to the exclusivity of matchings in two‐sided market settings.

CONTINGENT FEES FOR ATTORNEYS AS A METHOD OF PROTECTING PRIVATE AND PUBLIC INTEREST IN CASES OF CHALLENGING NORMATIVE LEGAL ACTS AND ACTS WITH NORMATIVE PROPERTIES CONTAINING EXPLANATIONS OF THE LEGISLATION

The present article is concerned with the analysis of the main problem in cases of contesting normative legal acts – the asymmetry between the opportunities of parties. As a consequence of that asymmetry, a rational citizen has no motivation to go to court and normative legal acts which contradict superior normative legal acts continue to exist in the system of actual law. The author adapts the American model of a “private attorney general” to Russian law. The aim of this model is to provide incentives for individuals to actively contest normative legal acts by means of covering judicial expenses with contingent fees. Incentives created by this law model are reviewed with the help of legislation analysis, economic analysis of law and game theory methodology. The author also considers the existing approaches to defining the legal nature of the term “contingent fees” in modern legislation. Based on that, possible ways of improving the legal system by the means of creating a legislative base for contingent fees are suggested.

On Plaintiff Preferences Regarding Methods of Compensating Lawyers

This paper analyzes a litigation contest in which the plaintiff’s lawyer and the defendant choose effort. The plaintiff selects the relative importance of a contract component related to the judgment (similar to contingent fees) and a component related to the lawyer’s efforts (similar to conditional fees) to ensure lawyer participation and guide the lawyer’s decision-making. For our setup, we find that the plaintiff considers the component related to the lawyer’s effort to be the relatively more desirable instrument in the light of its effort-inducing and cost characteristics. However, high levels of the lawyer’s outside utility may limit the role of this component.

How Do Risk-Averse Litigants Set Contingent Fees for Risk-Neutral Lawyers?

We examine a two-stage litigation in which risk-averse litigants set contingent fees strategically for risk-neutral lawyers. In the first stage of the litigation, each litigant sets a fixed fee and a contingent fee for his lawyer. In the second stage, each lawyer exerts effort to win a lawsuit on behalf of the litigant. Employing the subgame-perfect equilibrium as a solution concept, we obtain the following results. First, if a litigant sets a higher rate of contingent fee, then the opponent follows suit and the contingent fee fraction increases in the difference in litigant’s utility between winning and losing the case. Second, changes in a litigant’s initial endowment have different effects on the contingent fee fraction depending upon litigant preferences, while an increase in the prize of the case always increases the contingent fee fraction regardless of litigant preferences.