An Economic Analysis of Conflict of Interest Regulation
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Description
A superficial application of economic principles might suggest that ethics rules are likely to be uniformly inefficient. For the most part, these rules are promulgated by the organized bar without substantial input from other interests. In particular, clients (other than large organizations with in-house attorneys) are not strongly represented in the councils which formulate bar rules. One might argue, therefore, that ethics rules represent a naked exercise of guild power, serving the interests of lawyers at the expense of clients or the general public. But this would be an oversimplification. The organized bar, which has principal responsibility for drafting the rules of legal ethics, can enhance its profits in at least two ways: first, by limiting the supply of legal services available in the marketplace (mainly by restricting entry into the practice of law); and second, by adopting economically efficient rules that reduce costs (in part, by lowering the contracting costs between lawyers and clients). Either a reduction in costs or a decrease in supply will increase the profitability of legal services, and by engaging in both techniques simultaneously, the bar can enhance profits still more and do so over the long run. The efficiency implications of the supply-restricting and cost-reducing strategies utilized by the organized bar are complex and require careful case-by-case analysis. As a broad generalization, however, it would appear that while supply-reducing rules are likely to be inefficient on balance (because the welfare loss associated with the reduction in supply is greater than the welfare benefit that might be achieved by providing quality assurance), cost-reducing rules are likely, in many cases, to be efficient (because the bar’s interest in reducing the cost of providing legal services aligns well with the public’s interest in efficient contracting). Thus, while some ethics rules can indeed be understood as serving the interest of the organized bar at the expense of social wealth, other rules, arguably, can be justified on economic grounds. Efficient ethics rules are those that reduce contracting costs between lawyers and their clients by supplying reasonable terms to which lawyer and client would agree, in most cases, it they were able to bargain over the issue. The codes of professional responsibility, in other words, contain a number of “gap-filling” or “default” rules that supply terms to an attorney-client contract. Among the most important of such rules are those related to conflicts of interest. In part, our purpose is to identify an efficiency rationale for certain rules that have heretofore generally been analyzed from other, principally moral and ethical, perspectives. We believe that economic analysis can provide a satisfactory and coherent explanation for the structure of rules that we observe in the legal ethics area. Through the economic lens the rules in question can be seen as supplying reasonable implied terms to the attorney-client contract in an environment characterized by information asymmetries, agency costs, dangers of ex post opportunism, and associated costs of monitory and enforcement. A second purpose of this paper is to suggest an economic framework for interpreting the gap-filling rules in cases of ambiguity. Once the economic function of these gap-filling rules is clarified, they can be interpreted in a fashion that is likely to enhance the efficiency of the provision of legal services. Efficiency-based interpretations turn out to be generally consistent with reasonable moral intuition, but they are, in some cases, at variance with the constructions that courts or commentators have adopted. Thus, economic analysis of the gap-filling rules of attorney ethics may provide guidance for the interpretation of the rules of legal ethics in hard cases.
Source Publication
Foundations of the Law and Ethics of Lawyering
Source Editors/Authors
George M. Cohen, Susan P. Koniak
Publication Date
2004
Recommended Citation
Macey, Jonathan R. and Miller, Geoffrey P., "An Economic Analysis of Conflict of Interest Regulation" (2004). Faculty Chapters. 2023.
https://gretchen.law.nyu.edu/fac-chapt/2023
