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“Signaling” functions of a law department: posh firms, pricey partners, progressive practices

Law firms can proclaim to the world their quality, experience and prestige by their lush offices, their massive size, and their stratospheric billing rates. Each of these attributes economists would characterize as a “signal.” A signal is easy to observe but costly to imitate and it conveys quality. So far on this blog, I have mostly referred to the signaling functions of law firms (See my post of May 1, 2006: quality conveyed in price; May 26, 2007: high prices suggest quality; Feb. 17, 2008: wine tasting experiment; Oct. 19, 2008: neuroscience evidence of quality equated with cost; and Feb. 6, 2009: hourly rates are a signaling device for firms.).

Law departments too can signal. “Look at the DNC well-known firm we have retained for this acquisition or to defend us in that litigation!” A firm high in the league tables tells the other side that the law department really means business. The fancy firm that represents you is not only patent but also costly, a classic message by signal (See my post of Aug. 10, 2009: tony firms as a signal.).

Moreover, law departments can spread their peacock tails in other ways. They can signal their quality when they bring in a big gun partner to serve as general counsel or if they publicize a major initiative or if they make the cover of a trade journal as “Law Department of the Year.”