An attorney fee as a signal in pretrial negotiation

We consider the signaling role of attorney fees which have been usually assumed as exogenous in literature. We show that there exists an equilibrium in which the informed plaintiff uses both the attorney fee and the settlement demand as signals for his damage amount. If attorney service is not productive, this equilibrium yields higher social welfare than the equilibrium involving solely the settlement demand as a signal. If attorney service is productive, however, social welfare is lower in the former equilibrium. This has a policy implication that regulating attorney fees is socially desirable if the attorney service is productive.