Legal effort and optimal legal expenses insurance

In this paper we derive optimal legal expenses insurance for litigants and payment method for lawyers when neither the litigant's quantity choice nor the lawyer's legal effort is contractible. Three points are highlighted as our conclusions. First, to design an optimal insurance-payment system, demand-side cost-sharing is necessary. Second, supply-side cost-sharing is necessary only if the quantity and effort are substitutes and the payment contract involves hourly fees. Third, the optimal insurance-payment system could be achieved under conditional fees and sliding fees. Reputation incentives and side-contracts are also discussed in this paper.

► Optimal legal insurance is derived given non-contractible quantity and effort. ► To design an optimal insurance system, demand-side cost-sharing is necessary. ► Supply-side cost-sharing is necessary only if the contract involves hourly fees. ► The optimal insurance could be achieved under conditional fees and sliding fees. ► The lawyer's reputation concern may result in an increase in the legal cost.