Imagine a three-lawyer department where both reports to the soon-to-retire general counsel are in competition with each other for the promotion. If each lawyer rigorously controlled the costs of the law firms he or she manages, both would be better off because, let’s postulate, they could both be paid more. But both lawyers have a compelling personal benefit when they use the best and most expensive outside counsel because it increases their individual chances of success and recognition. Each lawyer faces compelling incentives to pay more to outside counsel, which means their collective pay will lag. They know that the worst scenario is for their rival to invest in outside counsel while they do not (See my post of Oct. 10, 2005: politics and succession planning.).
Lawyers in law departments compete with other lawyers, and as the example shows this competition can give rise to the classic dog-in-the manager of game theory, the prisoner’s dilemma. Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (Penguin Books 1995) at 127, further develop these ideas in the context of tournament behavior, where only one person can win (See my posts of Aug. 14, 2005: questions the relevance of game theory to law departments; Dec. 19, 2005: notes game theory as a major business concept; Feb. 8, 2006: possible applications; March 26, 2006: included as one of the concepts of economists; June 6, 2006 #2: Game Theory and the Law; and Jan. 1, 2008: agency theory draws on it.).