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Agency theory doesn’t translate from economics to law departments

Agency theory, one of the most influential economic theories according to Jeffrey Pfeffer and Robert I. Sutton, Hard Facts, Dangerous Half-Truths & Total Nonsense: Profiting from Evidence-Based Management (Harvard Bus. School Press 2006) at 65, “presumes that people at work seek self-interest with guile, deceit and cunning.” Moral hazard runs rampant. In economic theory, the term “moral hazard” refers to the possibility that the redistribution of risk changes people’s behavior. Accordingly, when a company agrees to pay one of its lawyer-employees a fixed salary, that decision transfers risk from the employee to the employer and changes the lawyer’s behavior. The lawyer may coast, freeload, and malinger unless there is constant supervision and control.

Pfeffer and Sutton maintain that there is much evidence to the contrary (See my posts of Jan. 16, 2006 on the principal-agent problem; Aug. 13, 2006 on moral hazard; and Dec. 23, 2005 on information asymmetries.). Lawyers may not want to sweat constantly over difficult and tricky legal conundrums (See my post of Oct. 18, 2005 on lawyers not wanting to think hard all the time.), but neither are they unscrupulous and conniving agents, shiftless gadabouts who shirk routinely.

In my experience, nearly all in-house counsel work steadily and try to do the right thing the right way.

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