The market for lawyers
Somewhat surprisingly, the law and economics literature is mostly silent on many questions relating to the market for legal services. What, if
anything, makes the market for legal services similar to - and different from - say, the market for apples? Lawyers provide legal services, which help individuals clarify property and other legal rights. Therefore, over the long run, the legal profession may play an important role in enhancing the efficiency of the allocation of resources. On the other hand, there is also a significant redistributive component to much of the activity in the market for legal services. As a result of such rent-seeking activities, lawyers can also play a significant part in reducing overall economic well-being.
Laband and McClintock (2001), for example, calculate that the vast majority of lawyers (over 600,000 out of a total of 880,000) make absolutely no contribution to productive economic activities in the United States. Epstein (1995) provides preliminary details of the growth of 'invisible foot' activities in the United States in the twentieth century, by examining the share of US GDP that is devoted to expenditure on lawyers. Between 1960 and 1987, this share doubled.
Economists are only just beginning to systematically study and understand the process of how and why resources are directed towards establishing, preventing, sustaining, modifying and abolishing wealth redistribution programmes and institutions.4 These activities have been referred to by various authors as 'rent-seeking' activities (Krueger, 1974); 'directly unproductive profit-seeking' (DUP) activities (Bhagwhati, 1982); 'invisible foot' and 'black hole' activities (Magee et al., 1989); and most recently as 'the dark side of the force' (Hirshleifer, 2001). As a result of these considerations, Magee (1992) has argued that there is an optimal number of lawyers for an economy, hypothesising that long- run economic growth an upside down U-shaped function.
This section develops a framework for analysing the market for legal services, where the demand for such services is driven solely by redistributive considerations, rather than efficiency-enhancing lawsuits. The welfare implications of perfect competition in this market under this extreme assumption are presented and analysed, and the incentive and welfare effects of taxes, price regulation, and government-imposed barriers to entry are considered. The main conclusion is that outcomes in such a market are very different from those we would expect in an ordinary market.
We use the approach outlined earlier in this chapter to examine these issues. Consider a general equilibrium version of the model analysed in section 11.5.1. Assume that there are a large number of plaintiffs and defendants, each of whom has the demand for legal representation given in (11.22). Normalise the size of the population of plaintiffs and
defendants to one. Then the aggregate demand for litigation services (assuming an impure version of the English rule is in place) is:
Now consider a simple long-run aggregate supply curve for lawyers. Suppose that this long-run supply curve is given by:
The supply curve reflects the marginal opportunity cost of legal services in their next best alternative. The total opportunity cost is therefore
(QS )2. In a perfectly competitive market for legal services, the long-run
equilibrium price equates supply and demand, so the competitive equilibrium price in this market is:
The equilibrium is illustrated in Figure 11.6.1 below.