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Tuesday, May 22, 2012

Deborah Jones Merritt: Law School Tuition, Monopoly Rents, and Law Prof Professional Responsibility

Deborah Jones Merritt (Ohio State), Price Sensitivity:

"Our consumers are not very price sensitive." I've heard that sentiment repeatedly during the last year, as colleagues across the nation respond to criticisms of law school tuition. ...

I wonder, in fact, how much of the tuition collected by law schools represents monopoly rents from the guild restrictions of the legal profession itself. To practice law, individuals must surmount significant barriers to entry: They must complete a four-year college degree, score decently on the LSAT, attend (and pay for) law school, and pass the bar examination (which often entails paying still more tuition for a bar review course). Increasingly, these individuals must also take a series of low-paying or volunteer positions to obtain practical experience and establish their credibility as lawyers. ... [L]aw school represents the single largest--and by far most expensive--barrier to entry. Potential lawyers don't get to choose their pipers: They must dance to our tune at whatever price we charge. ...

[L]aw schools are triply shielded from the free market: first by rules that restrict law practice to licensed lawyers; second by bar admission regulations that require applicants to graduate from accredited law schools; and third by self-designed accreditation standards. When we take advantage of these restrictions to escalate tuition far beyond inflation, we're not just stifling our graduates with debt; we're abandoning our professional responsibilities.

If you have a fetish for footnotes, DCM and I published a more academic version of these ideas last year (Responsibility-Rights in the Legal Profession).

http://taxprof.typepad.com/taxprof_blog/2012/05/deborah-jones-merritt.html

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Comments

This analysis is both factually incorrect and internally inconsistent.

(1) The author claims that one needs to graduate from an accredited law school to sit for the bar exam

This is incorrect. In both NY and California (two of the biggest and most lucrative legal markets), would-be lawyers can qualify to take the bar-exam by working under the supervision of a lawyer for a number of years. In D.C., lawyers can waive in after practicing in another state for a number of years.

Students don't go to law school because it is required to take the bar exam. They go because no one will hire them if they pass the bar without a law degree. Law schools, like the bar exam, certify a minimum level of quality and competence. Just as many people will only buy brand name clothing or electronics. Certification of quality is necessary to maintain a market in the face of asymmetric information about quality--read "the market for lemons."

Employers and clients--the Market--demand law school.


(2) The author claims that one needs to pass the bar to "practice law"

Except for appearing in court and litigating a case on someone else's behalf, this is largely incorrect. Most of what transactional lawyers do (negotiating contract terms, structuring deals, reviewing precedents) can be done by anyone and is often done by bankers, accountants, and business people. Even litigation can be handled "pro-se" if a client is willing to DIY. Clients turn to lawyers because clients trust lawyers to do the job right.

Once again, the market demands certified lawyers.

(3) The author claims that law schools have market power

There are 200+ law schools in the country, most with class sizes in the 200 to 500 range. Most states have several law schools, and students can go to law school in one state and take the bar exam in another.

Law school is a nationally competitive market with an exceedingly low HHI index (industry concentration). No one law school has "market power" and no anti-trust lawyer or economist would ever think to suggest that they do.

And if law schools do have so much market power and students are so price insensitive, then why do law schools offer generous scholarships to the most talented students? And why do students sometimes choose a lower-ranked law school that offers more scholarship money over a higher ranked law school that would be more expensive? Clearly, students are price sensitive and law schools compete on price.

(4) The author claims that students don't care about the price because they can get student loans

Seriously? Do home buyers not care about the price of house because they can get mortgages? Do consumers not care about the price of clothing or groceries because they can use credit cards? Do car buyers not care about price because they can get auto loans?

Loans have to be repaid with interest. They are not "free money." To suggest that people would magically stop caring about price because they can pay over time is to assume a shocking level of irrationality and downright foolishness. And law students, who are all college graduates, know better. Or at least should, if their college degree is worth more than the paper it's printed on.

(5) The author claims that the high cost of legal education is a "barrier to entry"

No it's not, because students can get loans. That's how credit markets work. They solve the liquidity problem and *reduce* barriers to entry by allowing people to pay over time even if they don't have the money today. The argument is both ignorant of basic facts and internally inconsistent. Loans solve a problem, they don't create it.

(6) The author claims that the LSAT and bar exams are barriers to entry

Yes, and they do a fine job of predicting competence, keeping students who couldn't pass the bar exam or get passing grades out of law school--and saving them money--and keeping lawyers who can't remember basic sets of rules and read and write out of practice--saving clients money and maintaining the integrity of the profession.

Any restriction based on quality will be a barrier. And often, an appropriate and necessary one to maintain trust by clients. That reinforces professional ethics; it does not undermine them.

Posted by: Anon | May 23, 2012 12:16:03 PM

If there were monopoly rents to accruing to being a member of the bar, we would expect there to be a shortage of lawyers at all times. We now see that lawyers are exiting the profession willy nilly. And, it is not just unemployed recent grads, but there is leakage from pre-mature retirements and mid-career career changes. Some monopoly, huh?

Posted by: Walter Sobchak | May 23, 2012 6:48:17 PM