Lawyers and Investment

Baptiste Massenot

doi:10.1515/rle-2012-0022

Article

Lawyers and Investment

Baptiste Massenot

Published/Copyright: January 14, 2014

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From the journal Review of Law & Economics Volume 9 Issue 3

Abstract

This paper presents a model of lawyers and investment. Investors use litigation to enforce their financial contracts with entrepreneurs. Litigation is modeled as a contest in which both agents hire lawyers to increase their probability of winning the trial. The issue and the cost of the contest determine how much investors are willing to lend. The model predicts that (i) more lawyers are hired if judicial efficiency is lower or damages are higher; (ii) higher judicial efficiency, higher damages, and tighter restrictions on the supply of lawyers benefit investment. Thus, the number of lawyers can be negatively correlated with economic activity even though lawyers are assumed to be productive.

Keywords: lawyers; litigation; investment

Appendix

Proof of Result 3

Differentiating eqs [5] and [23] with respect to j gives:

Assume , then we have:

We know that the first term is positive, the second is negative, and the third is positive. A sufficient condition for this inequality to be true is that the sum of the second and third terms is positive. Then, focusing on these two terms:

Replacing , gives:

Using eq. [23] to replace w gives:

The last inequality is true. Thus, this proves .

Differentiating eqs [5] and [23] with respect to d gives:

Assume , then we have:

The last inequality is true. Thus, this proves .

and

I now prove that Result 3 is strengthened if , in particular, if . Because only enters the demand for engineers , it only affects through . From eq. [4], This implies that the effect of j on is decreasing in . Because negatively affects , this implies that Result 3 strengthens when increases. A similar reasoning applies to d.

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1
Damages are assumed to be exogenous to keep parsimony. Damages can be computed differently in different countries, especially in complex cases, and judges may be more or less severe. Keeping damages exogenous thus makes the framework more widely applicable.
2
An alternative way of modeling the asymmetry that arises between the two litigants would be to assume that the dishonest party is less productive at producing arguments.
3
See Carbonara and Parisi (2012) for further details on how the loser-pays rule would modify the analysis.
4
Unlike lawyers, judges are not drawn from the population of workers. This is an arbitrary choice that is motivated by several considerations. First, if the number of judges was drawn from the population and was exogenous, this would not influence any of the results since this would amount to a situation where the overall supply of labor is lower but still exogenous. A perhaps more interesting case would be if the number of judges was endogenously determined. However, this would require to add a whole new mechanism of how this process works, which would be out of the current focus of the paper.

Published Online: 2014-01-14

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https://doi.org/10.1515/rle-2012-0022

Keywords for this article

lawyers; litigation; investment