A economic point that distinguishes law-firm discounts from rebates

What is the difference between a law firm agreeing to discount its rates and agreeing to rebate a portion of the fees paid to it if the fee total exceeds an agreed-upon amount? Timing, certainly. Psychology, too, since the rebate encourages a law department to use the firm more.

An economist would argue that a law department which accepts a 10 percent discount from a law firm should, alternatively, seek perhaps a 12 percent rebate from that firm. The discount savings come immediately; the rebate savings come later and have some risk of “payment,” in that the department might not exceed the rebate trigger level. Hence, the net present value of the discount today is equal to the higher rebate value tomorrow (See my post of March 26, 2006 on economists’ terms of art.).

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