Incentives favour franchisee attorneys defecting from their clients’ interests

The good grasp of the academic disciple of Law and Economics is necessary in understanding franchising.

Economics is (almost) all about incentives: A highly unified profession, serving a highly centralized, tightly disciplined franchisor-dominant industry  would lead the observer to predict very high levels of attorney-generated opportunism (self-interest + deceit) at the expense of their clients: individuals and groups of franchisees. The rational lawyer defects because that decision makes the best of a highly imperfect information situation.  The new franchisee bar member quickly realizes that economic survival depends on his or her obedience as a gatekeeper for the “team”, in stark contrast to a Canadian justice system that is more and more sympathetic to franchisee arguments.

Hadfield is required reading for franchisees considering contracting for such high-risk legal services (credence goods).

The Price of Law: How the Market for Lawyers Distorts the Justice System

Gillian Hadfield
USC Law School and Department of Economics
October 1999
Michigan Law Review, Vol. 98, No. 4, 2000

Abstract:
This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees–which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly–the familiar monopoly established by artificial barriers to entry, the “natural” monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state’s monopoly over coercive dispute resolution.

The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients–with justice interests at stake–into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market.

The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations.

The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments–one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices.

The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system. [my emphasis]

Number of Pages in PDF File: 84

Accepted Paper Series

Download from SSRN here.

 

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