Career concerns are particularly relevant in the legal profession since the variance in lawyers’ earnings is large. Moreover, differences in perceived talents are a substantial determinant of the abovementioned variance. In her BSE Working Paper (No. 844) “The Effect of Lawyers’ Career Concerns on Litigation,” Rosa Ferrer studies how career concerns influence effort levels, litigants’ strategic interactions, and the role of the difficulty of the case as a multiplier of the career concerns implicit incentive.
Commercial advertising of legal services is becoming more frequent in EU countries; however, there are still constraints to advertising past performance in court. Can these constraints be justified in terms of social welfare? To what extent could lawyers’ career concerns affect litigation decisions? This paper explores this question by developing a theoretical model in which the outcome of the trial depends on the lawyers’ talents and their choice of effort. Lawyer’s talents are not directly observable but performance in court provides information about their skills. Therefore, the information about lawyer’s skills conveyed in trial outcomes plays an important role in lawyers’ strategic decisions. In particular, the expectations of future earnings growth upon winning constitute an incentive that generates interactions among lawyers opposing each other in court.
Rosa Ferrer also studies the effects of career concerns on litigations decisions when they interact with merits of the case (i.e., the difficulty of the case). The merits of the case might directly affect how informative is the trial outcome on the attorney’s talents. Therefore, case merits might enhance or undermine the incentives provided by attorney’s career concerns.
The reputational gain
Firstly, the paper analyzes the way in which the market forms beliefs about attorneys’ talents, since attorneys’ career concerns influence effort decisions through the reputational gains obtained once the trial is resolved.
Regardless of the functional form used to model the binary trial outcome, the implicit incentive can be characterized by three components, namely, the ex-ante uncertainty on the lawyers’ talents, the sensitivity of the trial outcome to the lawyers’ talents, and the variance of the noise in the trial outcome (noisiness, hereafter), which is endogenous. These components interplay with the lawyers’ effort levels because they affect how informative is the trial outcome on the lawyers’ talents.
The author finds that reputational gain is greater the larger is the initial uncertainty about the talent of the attorney. Intuitively, the market in relative terms learns more from the trial outcome if the initial information is less accurate. In addition, the reputational gain is also increasing on the sensitivity of the trial outcome to the attorneys’ talents. For instance, if verdicts come from juries rather than from a judge, the outcome might be more informative about attorneys’ talents since juries might be more sensitive to attorneys’ abilities while judges might pay more attention to the legal aspects of the case. Finally, the reputational gain is decreasing in the noisiness of the trial’s outcome, which is endogenous. If the outcome has a larger random component it is intuitive that the gain associated to performing well decreases, as luck would play a larger role.
The equilibrium efforts
The strategic interactions concerning the choice of effort in equilibrium operate mainly through the reputational gains described above. Also, attorneys’ choose their equilibrium effort levels strategically based on how each other’s efforts indirectly affect the trial outcome’s informativeness about their talents.
Accordingly, the equilibrium effort levels are increasing in the career concerns of the attorneys and in the initial uncertainty about the attorneys’ talents. The greater is the variance of the prior about their talent, the more incentives attorneys have to exert a higher effort level.
The tournament component, typical of legal disputes, implies that higher equilibrium effort does not necessarily lead to a higher performance, measured by the probability of prevailing in court. Increasing the career-concerns incentives of the two opposing agents, can make both litigating parties worse off, since both attorneys would increase the equilibrium effort levels without affecting their expected probability of winning the case. Therefore, results show that career concerns can lead to an increase in litigation costs without necessarily improving the litigants’ payoffs.
The merits of the case can interact with career concerns through three possible channels: First, they might affect attorney’s returns from effort. Second, by affecting the trial outcome noisiness and, as a consequence, the incentives to provide effort in court. Third, the merits may directly affect the trial outcome’s informativeness about the attorney’s talents.
The latter channel is particularly relevant. Merits can potentially enhance the transmission of information on attorneys’ talents. Facing an unfavorable case can actually increase the sensitivity of the trial outcome to the attorney’s talent. For instance, winning a less favorable case can be more informative about her talent than winning an intermediate case. Consequently, even though less favorable merits can increase the marginal cost of effort, they can also lead to a larger reputational gain from winning the case.
The settlement process also depends on career-concerns incentives. As the lowest settlement amount that the plaintiff is willing to accept depends on her expected payoff in the case of trial. That means that it would be beneficial for the plaintiff to accept a settlement as long as it is larger or equal to the exante expected payoff from going to trial. A symmetrical reasoning applies to the defendant so that the settlement range is a measure of the surplus from reaching an agreement. Therefore, even when the trial does not take place, the settlement is determined endogenously in the litigation stage. Thus, higher career concerns, which induce higher equilibrium efforts, result in a larger scope for settlement.
The effects of career concerns on social welfare are ambiguous. On the one side, the reputational incentives might induce attorneys to exert higher equilibrium effort levels, which reduce moral hazard problems. On the other side career concerns can generate rat-race effects leading to higher litigation effort without actual effect on the outcome of the trial. This latter distortion does not necessarily decrease overall social welfare (e.g., it could lead to a more accurate trial outcome) but it can lead to larger trial costs for both sides of the dispute.
This paper shows that career concerns affect lawyers’ strategic interactions, inducing higher equilibrium effort levels. These litigations decisions ultimately depend on how informative the trial outcome is about the attorney’s talents. For this reason, on the one hand, the article provides some useful policy implications for countries where high litigations expenses are a concern. On the other hand, in countries with high levels of moral hazard between lawyers and their clients, career concerns could reduce the size of this problem. For instance, the transmission of information on trial outcomes via commercial advertising could have beneficial effects in this case. In general, since litigation procedures can influence how sensitive is the trial outcome to the attorneys’ talents, they could be used as a policy tool. In particular, they can be designed to influence lawyers’ litigation effort taking advantage of lawyers’ career concerns incentives.