Should Lawyers Lie to Their Clients? Biased Expertise in Negotiations

I propose a theoretical model to analyze the effects of cheap-talk legal advice on pretrial negotiations with asymmetric information when a conflict of interest between plaintiffs and attorneys is possible. An informed defendant makes a settlement offer to an uninformed plaintiff who may consult her attorney before taking the decision. Hiring an attorney biased against going to trial does not affect the outcome of the negotiations. Conversely, hiring an attorney biased towards going to trial improves the settlement offers received by the plaintiff. Negotiations fail only when the conflict of interest between the plaintiff and the attorney is extreme. Typically the plaintiff is able to separate the defendant with high liability value from the defendant with low liability value without trial. The incentives of the agents can depend on contracts that specify the attorney’s fees. Optimal contracts always result in some conflict of interest. Commonly used contingency-fee and hourly-fee contracts are optimal for some parameters of the model. Contracts which perfectly align the incentives of the agents are feasible but never optimal.