Don’t miss this entertaining featured discussion over at PointofLaw.com in which PofL’s Jim Copland and Alex Tabarrok of Marginal Revolution fame debate contingent legal fees. Jim is the director of the Center for Legal Policy at the Manhattan Institute and is a leading advocate for reform of Americaís civil justice system, while Alex is a member of George Mason University’s up-and-coming libertarian-oriented economics department. An earlier post on Alex’s research into contingent fees is here.
Although Jim does not advocate a prohibition on all contingency fee arrangements, he makes the following case for regulation:

[U]nder a contingency fee arrangement, plaintiffs’ lawyers accept not only cases that are likely to succeed but long-shot cases with high potential damage payouts. A risk-neutral plaintiffs’ lawyer with a diversified portfolio of cases is just as happy to take a case with a 1 percent chance of paying out $20 million as a case with an 80 percent chance of paying out $250,000.
But as a society, do we really want to be flooded with high-dollar, low-probability claims? The contingency fee creates a very real incentive to play the “lawsuit lottery”óa lottery with positive expected returns for the plaintiff and client, but substantial social costs. At a very basic level, the contingency cap, while a crude mechanism, ameliorates this problem. If a lawyer’s take in a case goes downó-especially for high-dollar cases-óthe incentive to take shoot-the-moon cases falls proportionately.

To which Alex replies:

If a lawyer and her client want to contract in Lira what business is it of the state to interfere? If the lawyer and client agree on an incentive plan, why should that be regulated? Do we want to regulate contingent fees in other areas? A money-back guarantee, for example, is a contingent fee – you pay only if the product is a winner. A tip is a contingent fee – you pay only if the service was good.
True, not all contracts should be respected – we don’t enforce contracts against the public interest – nevertheless, my spider-sense starts to tingle whenever reformers of any stripe try to abrogate private contracting.

Walter Olson also has more.