Academic journal article The European Journal of Comparative Economics

The Regulation of Quality in the Market for Legal Services: Taking the Heterogeneity of Legal Services Seriously

Academic journal article The European Journal of Comparative Economics

The Regulation of Quality in the Market for Legal Services: Taking the Heterogeneity of Legal Services Seriously

Article excerpt

Abstract

Reviewing the public and private interest approaches to the regulation in the market for legal services, this article points out their mutual inconsistency and their empirical and theoretical limits. It then argues that heterogeneous legal services should be considered when (de)regulating the market. Drawing upon the distinction between credence, experience, and search goods, we distinguish various legal services according to the degree of asymmetric information on quality characterizing the relationship between lawyers and clients. We argue that the heterogeneity of legal services impacts on the desirable level of regulation, implying that not all the markets for legal services should be regulated or, conversely, deregulated. Furthermore, when regulation is needed, the degree of asymmetric information between the regulatory authority and lawyers partly determines the choice between external and self-regulation.

JEL codes: K2, K4, L14, L15, L44, L84

Keywords: quality, regulation, self-regulation, lawyer, legal services, credence good

Introduction

During the last decade, the DG Competition of the European Commission (EC) has promoted the "need to modernise the professions in Europe" within Member States (EC, 2005, p. 11), including lawyers' services1. Such modernisation of legal services involves enhancing competition in this market "usually characterised by a high level of regulation" (EC, 2004, p. 3). Indeed, in all European countries, the provision of legal services is regulated by a mix of governmental regulation and self-regulation by a professional body. Although applicable rules and their scope may vary across countries, in all of them, becoming a lawyer requires to fulfil education and training obligations and to comply with rules of professional conduct. Most of these rules consist of exclusive rights to perform specified services, of limitations on the pricing of services, on advertising, and on forms of business organization.

Now, the EC (2004, p. 7) observes that "in countries with low degrees of regulation, there are proportionally higher numbers of practising professionals generating a relatively higher overall turnover". It then considers that "[a] light regulation is not a hindrance but rather a spur to overall wealth creation", consequently urging Member States "to reform or eliminate those rules which are unjustified" (ibid., p. 4). A greater competition is expected "to lower prices, to increase quality or to offer innovative services" (ibid., p. 7), and to improve "the availability of better and more varied professional services, [that] could increase the demand, which in turn would have a positive impact on job creation" (EC, 2005, p. 4). The OECD (2007) adopts a similar point of view, stating that "the quality and the competitiveness of professional services have important spill-over effects since they affect the costs of necessary inputs for the economy and business" (OECD, 2007, p. 17).

These reports both rest on and result in an abundant economic literature on legal services2. Using the traditional law and economics analyses of regulation, they build upon two main approaches, respectively the public interest and private interest approaches to regulation (Den Hertog, 2000; Ogus, 2004). First, following up the public interest point of view, both reports underline that "certain regulations are in the public interest as a remedy to market failures". Second, they next embrace the private interest line, stressing that "regulation and self-regulation at times appear to serve mainly the private interests of the profession" (OECD, 2007, p. 10). Recalling that competition law applies to professions, they consequently deplore rules on fees, advertising and business structures, as well as the existence of exclusive rights and entry regulations.

This article criticizes this way of analyzing the regulation of legal services. Indeed, the public and the private interest approaches do not only lead to opposite theoretical propositions but also to policy recommendations that are limited to the sole debate between regulation and deregulation. …

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