Asymmetric Information
1.
(See problem 18.1) A lawyer works as an agent for an injured plaintiff.
The expected
award from the case is e, where e is the lawyer’s effort.
The cost of the lawyer’s
effort is e
2
/2.
a.
What is the lawyer’s effort, his surplus, and the plaintiff’s surplus in
equilibrium when the lawyer’s contingency is 1/3 (i.e., the lawyer gets 1/3 of
the award)?
b.
Repeat part (a) for a general contingency fee of c.
c.
What is the optimal contingency fee from the perspective of the plaintiff?
Compute the surpluses for the lawyer and plaintiff.
d.
What would be the optimal contingency fee from the plaintiff’s perspective if
he could “sell” the case to the lawyer (i.e., the plaintiff would give the final
award to the lawyer in exchange for some upfront payment)?
Answer:
a.
L=lawyer’s surplus & P=plaintiff’s surplus.
L=(1/3)ee
2
/2.
∂
L/
∂
e=1/3 – e =0,
so e*=1/3.
L*=1/9 – 1/18 = 1/18.
P*=(2/3)e=2/9.
b.
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 Spring '08
 Buddin
 Utility, gross profits

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