The endowment effect and law-firm billing arrangements

According to social scientists, mere possession of an item increases the value a person places on it. This they call the “endowment effect.” The effect shows up when someone has been the highest bidder for an item in an auction, or when they have touched the object for which they are bidding. In both cases, people bid higher, according to Strategy+Business, Issue 41, at 139, citing an article.

When a law department conducts a competitive bid, bidders from incumbent firms feel the endowment effect – “we possess that work now, so we will bid higher for it.” When a law department invites finalist firms to come and look at files, meet key clients, and talk with the in-house counsel, the department boosts the endowment effect and the bids. Perhaps the law department should identify the finalist firms, and thereby increase even more their competitive feelings.

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