The economist’s “signal” by departments when they announce they retain large law firms

Peter Leeson, The Invisible Hook: The Hidden Economics of Pirates (Princeton Univ. 2009) at 94, discusses the economist’s concept of signaling. “The key to a successful signal is that it must be more costly for some types of individuals to send than for others.” Customary reliance on expensive, big law firms tells the world that this is a general counsel to be reckoned with, a serious player, Ozymandius!

Certainly, big firms may house the skills needed to wrestle with complicated legal issues; by all means big firms have overseas offices to coordinate international aspects; obviously phalanxes of associates can charge into the breech, all resources the big firms can marshal. For an economist, the signaling comes from the big price tag of the big firm – general counsel with less stature and clout can’t keep up the with Joneses. “Look at me, I can and will afford the best” it signals to peers and adversaries (See my post of May 1, 2006: signaling function of standard rates; July 14, 2006: signaling function of plush offices.; Feb. 9, 2009: high rates signal for law firms; and Feb. 17, 2008: quality signaled by high prices.). This psychological message might explain to some degree why size of legal department correlates with size of law firm retained (See my post of July 31, 2009: larger departments retain larger firms.).

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