Do Transactional Lawyers Add Value?

5 December 2007 at 1:35 am 4 comments

| Peter Klein |

What do bosses do? asked Stephen Marglin in his famous 1974 article. Nothing productive, he said; they create hierarchies with task specialization to extract value from laborers. Despite heroic efforts by David Landes and others to set the record straight, the myth has persisted, in some quarters, that “management” — including intermediation, market-making, the facilitation of transactions, etc. — does not create economic value, but merely redistributes it. Making widgets is OK, but merely facilitating widget transactions is wasteful or redundant.

How about transactional lawyers? Do they add value by reducing transaction costs, minimizing the chance of ex post litigation, reducing regulatory burdens, acting as reputational intermediaries, providing confidentiality, or exploiting economies of scope? Or do they simply extract value from the transacting parties?

An interesting paper by Steven Schwarcz, “Explaining the Value of Transactional Lawyering,” uses survey data to examine this question and finds that reducing regulatory costs appears to be the main source of added value. The results “present a very different picture of how business lawyers add value than that portrayed by existing scholarship, challenging the reigning models of transactional lawyers as ‘transaction cost engineers’ and ‘reputational intermediaries,'” activities in which lawyers do not necessarily have a comparative advantage. Instead, suggests Schwarcz, it is precisely lawyers’ expertise in (business) law that gives them a role in the contracting process. (The broader question of whether legislators, most of whom are also lawyers, deliberately design rules of contract law, regulation, administrative procedure, and the like so that only other lawyers can understand them, is not addressed.)

The paper is filled with useful tidbits about the contracting process of interest to economists and management scholars. For instance, respondents suggested that the main purpose of contracting is not to mitigate against specific hazards, but to establish a general framework for governing repeated transactions (akin to Karl Llewellyn’s notion of “contract as framework,” frequently invoked by Williamson). “Almost half of all lawyer-respondents, and two-thirds of client-respondents, said that none or at most only some of the issues over which contracts were litigated were anticipated during negotiation. Furthermore, none of the lawyer-respondents regarded “protecting [the] client from future litigation” as the sole primary goal of contracting. Although most lawyer-respondents saw that protection as an important goal, the only sole primary goal they identified was creating a roadmap for the parties to follow in their ongoing relationship.”

Entry filed under: - Klein -, Business/Economic History, Institutions.

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4 Comments Add your own

  • 1. twofish  |  6 December 2007 at 7:47 am

    I find amusing papers that spend a lot of time establishing to academics things that are obvious to people in the business.

    The main reason you want a lawyer is that if you don’t have one on your side, and the other guy has a lawyer on his side, you are going to get screwed in a big way.

  • 2. teageegeepea  |  9 December 2007 at 4:35 pm

    You might be interested in this on “guard labor”.

  • 3. Lawyerahead  |  22 January 2009 at 1:06 am

    I completely agree with twofish, people generally are not even aware about most basic laws, so they need a good lawyer who can guide them all the way.

  • 4. Peter Mc'beth  |  25 April 2017 at 10:16 pm

    Hi,
    Very informative article, I agree and I think lawyers are very important now a days as they gives the best legal advise and deals with all the legal issues

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