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“Credence goods,” the risk that a firm will over-lawyer, and some protections for law departments

Experts who not only provide a valued service but also tell the customer what service is needed control both ends of what economists call a “credence good,” according to the Economist, April 15, 2006 at 78, because customers – think of a law department that retains a partner who is an expert in some arcane field – take it on faith that the partner has given them the legal services they need, and no more.

As derived from the article, to reduce the risk of being sold too much legal work (over-lawyered), an in-house lawyer can cope two ways. If that purchaser of legal services understands the incentives the partner faces and acts on that knowledge, some of the incentives for expert dishonesty shrink. If hours billed is the partner’s driver, fly-speck bills or insist on fixed fees. The other way to cope is to consume services when the margins for all services are the same. Huge lawsuits have higher margins for firms than do slip and fall cases. This tactic works, however, only if the partners and associates are fully booked. “In quiet periods, however, the opportunity cost of ‘overtreating’ clueless [in-house lawyers] falls, and the rewards rise.” The counter-intuitive second tactic, if you are worried about being over-charged or over-worked, is to pick the busiest capable partner you can find.