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Self-regulation of the legal profession and quality in the market for legal services: an economic analysis of lawyers’ reputation

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Abstract

Our article intends to show that self-regulation of the legal profession helps to regulate the quality of legal services in a market characterized by strong information asymmetries. Our model highlights the role of the collective reputation of the profession jointly with the individual reputation of lawyers to sustain high quality. It shows that a high-quality steady state exists in a market for legal services and that the likelihood of high quality increases when the market is self-regulated by the legal profession as compared with the situation where there is no self-regulation. Moreover, the profession has an incentive to maintain a good collective reputation as this increases the clients’ willingness to pay for legal services and, therefore, the rent that accrues to lawyers as a whole.

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Notes

  1. For a survey on the regulation of lawyers, see Stephen and Love (1999) and Stephen and Burns (2007). For a critical review of the law and economics literature on that issue, see Chaserant and Harnay (2010).

  2. According to Schroeter et al. (1987), the time needed to complete routine services, such as uncontested divorces or simple wills, has a small variance across professionals. Cox et al. (1982) emphasize that the quality of routine services per se is not a significant variable either from the lawyer’s or the client’s perspective.

  3. The literature on individual reputation also highlights the role of the repeat-purchase mechanism to discipline behaviours (MacLeod 2007). Indeed, regular consumers of legal services (most often firms) can infer current quality from their past interactions with a given lawyer and decide accordingly whether to repeat purchase or not. In this article, we develop a matching model that does not consider the repeat-purchase mechanism (see the conclusion for a discussion on this point).

  4. Economic models of reputation usually consider either hidden information (where the agent’s reputation is defined as the belief of others about the agent’s type) or hidden action situations (where the agent’s reputation is defined as the belief of others about the agent’s equilibrium behaviour). For a review, see Bar Isaac and Tadelis (2008).

  5. An equivalent assumption is that there is only one type of lawyers and that effort for producing high-quality services involves no cost with probability h (the lawyer yet delivers a high-quality service), an infinite cost with probability l (implying the production of a low-quality service), and a positive cost e with probability u, the lawyer then behaving opportunistically.

  6. In the limit case of a completely regenerated population at each date (λ = 0), then I = 1: all the lawyers have a good reputation, as they are all newcomers. Accordingly, the younger the lawyers’ population, the smaller the number of their past periods of production and the higher the average probability that low quality remains undetected.

  7. We do not examine distributive problems within the profession and simply assume that lawyers share the professional rent at each period.

  8. Newcomers are randomly drawn from a pool of lawyers containing the proportions h, l, and u of good, bad and opportunistic lawyers respectively. Thus, there is no screening of new lawyers by the profession.

  9. In practice, dissatisfied clients willing to complain about their lawyer are allowed to report low quality to the professional authorities. However, only a very small number of complaints are filed. For a French case study, see Chaserant and Harnay (2013).

  10. If we allow consumers to systematically report observed low quality to the profession, then we find the case of “pure” collective reputation studied by Tirole (1996). Indeed, when consumers can report low quality to the profession, then at each date the probability \(\pi^{P}\) for the profession to observe that a lawyer has delivered low quality at least once is \(\pi_{t}^{P} = \pi_{t - 1} + \pi_{t}^{e}\), where \(\pi_{t - 1}\) is the probability that a client observes a lawyer cheating at the previous period and reports it to the profession, and \(\pi_{t}^{e}\) denotes the detection probability of the profession on its own. Given that there are no type-I errors, consumers cannot convey mistaken information to the profession. Therefore, if they report observed low quality, it follows from assumption 3 that the profession then dismisses the detected lawyer at the next period. As a result, as long as \(\pi_{t}^{e} > 0\), \(\pi_{t}^{P}\) is superior to \(\pi_{t - 1}\). This reflects the higher expertise of the profession in assessing the actual quality of the services provided by its members, consistent with the literature on self-regulation, according to which a profession is better informed than non-members about the actual behaviours of its members. Calculating the average probability that past low quality remains undetected within the market leads to the case of pure collective reputation studied by Tirole (1996). In this case, the consumers of a product cannot observe the individual reputation of the worker who produced that product, but they can observe the collective reputation of the firm the worker belongs to. Whereas Tirole (1996) studies the impact of individual and collective reputations separately, our article analyses them jointly, reflecting the multiple ways consumers gather information on quality in the market for legal services.

  11. Thus, the high-quality steady-state proportion of bad lawyers is lC < l. In the high-quality steady state (where all opportunistic lawyers produce high-quality services), the profession only strikes off bad lawyers, whereas the proportions of good, opportunistic and bad newcomers are (1-λ)(h, u, l). Thus, there are more bad lawyers who leave the market than bad lawyers who enter it.

  12. Hence, there is more firing in that situation than in the high-quality steady state. There is therefore more turnover in a profession having a bad collective reputation than in a profession having a good one (Tirole, 1996).

  13. As conditions 7 and 10 are not mutually exclusive, multiple steady states may exist.

  14. Here again, note that the vested interest of the profession is to screen entrants at the hiring stage in order to increase the proportion h of good lawyers, raising consumers’ willingness to pay \(p_{L}^{*}\) and, therefore, the rent that accrues to the profession.

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Acknowledgments

The authors gratefully acknowledge comments from the participants to the conferences of the European Association of Law and Economics (Paris, 2010), the Canadian Law and Economics Association (Toronto, 2010), the Journées de l’Association Française de Sciences Economiques (Besançon, 2011), the 23rd SASE Annual Conference (Madrid, 2011), the Conference of the International Society for New Institutional Economics (Firenze, 2013), and the workshop “The professions between regulation and competition: interdisciplinary approaches” held at the University Paris Ouest Nanterre La Défense (Paris, 2013). We are also grateful to the Mission de recherche Droit et Justice, French Ministry of Justice, for financial support. We also thank Fabienne Llense and anonymous referees of the Journal for their helpful comments. All remaining errors are ours.

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  1. EDEHN, EA 7263, Université du Havre, 25 rue Philippe Lebon, 76600, Le Havre, France

    Camille Chaserant

  2. EconomiX, CNRS UMR 7235, Université Paris Ouest Nanterre La Défense, 200 Avenue de la République, 92001, Nanterre Cedex, France

    Camille Chaserant & Sophie Harnay

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  1. Camille Chaserant
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Correspondence to Sophie Harnay.

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Chaserant, C., Harnay, S. Self-regulation of the legal profession and quality in the market for legal services: an economic analysis of lawyers’ reputation. Eur J Law Econ 39, 431–449 (2015). https://doi.org/10.1007/s10657-013-9420-1

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