Access to justice and market failure

First published on slaw.ca

Lemonish Lawyers [1]

The problem of access to justice is likely the result of a number of causes. Unnecessary complexity in substantive and procedural law is likely part of the problem. Our adversarial court-based administration of justice is problematic both where powerful actors have disputes with ordinary people and where family disputes require resolution. Ease of access to information through the internet may be both part of the solution and part of the problem.

Market regulation and access to justice

Our approach to legal services regulation plays a role as well. Limiting who can provide legal services restricts how legal services are provided and protects licensed lawyers and paralegals[2] from new forms of competition. Some problems cannot be economically addressed by spending the time of legal experts at costly hourly rates yet innovative new ways of providing legal services are prohibited.

Limiting legal service provision to licensed lawyers has always seemed to me to provide a logical explanation for the puzzling gap between legal services supply and demand. While there are substantial unmet legal needs, lawyers simply can’t survive if they drop their rates to the level that cost-effectively addresses most ordinary legal needs. Ordinary people won’t spend more to solve a problem than the problem is worth. Allowing new ways of obtaining legal services logically addresses this gap. Said another way, the market for legal services is constrained by limiting the supply side thereby causing unmet demand.

I make these points (none of which are new) as context for the balance of this column which suggests that there may other market failures present in the legal services market that impair access to justice. On this view, new ways of understanding and addressing problems of access to justice appear.

Information asymmetry and market failure

In the 1960s, economic theory evolved from its earlier focus “on figuring out the conditions that would allow markets to work perfectly” to a new focus on “what would happen when these conditions fail”[3]. One of the requirements for perfect markets is perfect information. Perfect market models assume that buyers and sellers are perfectly informed and accordingly can effectively see the value to them (“utility” to an economist) of goods and services that are bought and sold.

Of course, it is absurd to think that market participants are perfectly informed. Virtually inevitably, potential sellers know more about their wares than do potential buyers. George Akerlof was awarded the Nobel Prize in economics in 2001 for his research addressing the problems that arise in markets where sellers have material information that buyers do not (i.e. “asymmetric information”).

Akerlof’s research led to publication of his 1970 paper The Market for Lemons: Quality Uncertainty and the Market Mechanism[4]. As an example of a market with asymmetric information, Akerlof examined the used car market. Unlike the new car market where most all cars of a particular type have the same qualities, there are “lemons” and “peaches” in the used car market. Sellers know whether their cars are lemons. Most buyers have no ability to assess the quality of a used car. There is asymmetric information on a fundamental question on which value depends.

If “lemons” are worth $2,000 and “peaches” are worth $10,000, what happens in a market in which buyers can’t tell the difference? The answer is smart buyers won’t pay more than about $2,000 for any used car, buyers who only want a “peach” won’t buy at all and owners of “peaches” won’t be able to sell them for a reasonable price. Asymmetric information similarly can cause a downward quality spiral where producers see no point in providing “peach” quality service because purchasers can’t tell the difference and so will only pay “lemon” prices[5].

This problem of asymmetric information is part of the reason that cars depreciate so much when first purchased and driven off the lot and is part of the reason that “used car salesman” is a term of derision.

The labour market provides another example of market failure based on asymmetric information. Why is it that it is easier to find a job if you have a job and why does it get harder to find a job the longer that one is unemployed? The answer is that prospective employers don’t know whether the prospective employee is a lemon or a peach and rely on limited and often inaccurate information to avoid employing a lemon. Where an employer can’t effectively judge the quality of a prospective employee, employers assume that the currently employed are of higher quality than the unemployed and that the recently unemployed are of higher quality than the longer term unemployed.

But if asymmetric information leads to market failure, how did eBay come to be such a success? Buyers and sellers deal with each other virtually and at a distance. Information asymmetry is a particular problem where buyers and sellers don’t know each other and buyers can’t inspect the products being sold.

The answer appears to be that eBay took great care to provide market signals on which potential buyers could rely. One of eBay’s solutions is the establishment of an “Expert Community” where thousands of eBay members post advice on how to avoid buying a “lemon” or otherwise being taken advantage of. eBay encourages and organizes ratings of buyers and sellers so that confidence is enhanced by information from other market participants and so that taking advantage is deterred. As well, eBay has established one of the largest dispute resolution systems in the world. eBay has effectively reduced information asymmetry and has provided remedies that allow transactions to proceed despite a degree of information asymmetry.

On reading about information asymmetry and eBay in the recently released book The Inner Lives of Markets[6], I was struck by the question of information asymmetry in the practice of law. Clients would not need lawyers if they did not require expert assistance. By definition, unsophisticated clients have difficulty assessing the quality of their legal advisors and the quality of the legal assistance provided to them. Indeed, law is described as a “credence good”. Unlike a great (or lousy) dinner, it is difficult for consumers of legal services to assess the impact of legal services even after they have been provided. Also, unlike a used car, there is no sticker price nor even price negotiation prior to sale.

The market for legal services for ordinary people is fairly characterized as a market with asymmetric information as to the quality of the lawyer, the price of the services on offer and what is reasonably achievable as a result of proffered services. Ordinary consumers are at a very decided information disadvantage compared to the lawyers offering their services.

Professional self-regulation as a way of addressing market failure?

Keeping the problem of information asymmetry in mind, professional self-regulation can be thought of in a different way. Lawyers have ethical obligations of candour which require disclosure of information relevant to their retainer and disclosure of errors and omissions. The Law Society provides assurance of competence by requiring legal training and by testing prior to entry to practice. Further assurance of competence is provided by mandatory errors and omissions insurance and, it is thought, by mandatory continuing professional development. The Law Society provides assurance of proper conduct by establishing codes of professional conduct and by disciplining for professional misconduct.

It is interesting in this context to note that the definition of professional misconduct in Ontario is “conduct in a lawyer’s professional capacity that tends to bring discredit upon the legal profession”. It is also interesting how the discipline case law justifies license revocation in cases involving fraudulent or dishonest conduct. As the Divisional Court recently said in Bishop v. Law Society of Upper Canada, 2014 ONSC 5057 at para. 28:

… [There is a] pressing need to send a consistent message that engaging in fraudulent conduct by a lawyer is a matter that will not be tolerated because of its impact on the profession as a whole.  As was observed by Sir Thomas Bingham M.R. in Bolton, at p. 519:

The reputation of the profession is more important than the fortunes of any individual member.  Membership of a profession brings many benefits, but that is a part of the price.

While we ordinarily think of professional self-regulation in terms of protection of clients and the administration of justice, it is quite plausible to see assurance as to candour, competence, quality of service and professional conduct as addressing information asymmetry. It signals to prospective clients that they can retain lawyers without fear that they are retaining a lemon lawyer.

In the same way, applying fiduciary law to the lawyer-client relationship can be seen as providing assurance in the face of information asymmetry and addressing the fact that law is a credence good. With this thought in mind, Justice Binnie’s statement in Strother[vii] takes on new meaning:

… Monarch was dealing with professional advisors, not used car salesmen or pawnbrokers whom the public may expect to operate on the basis of “didn’t ask, didn’t tell”, and who collectively suffer a corresponding deficit in trust and confidence.  Therein lies one of the differences between a profession and some businesses.

Perhaps the difference between a profession and some businesses is that professions organize their affairs more like eBay (and less like used car salesmen) by reducing information asymmetry by requiring candour and by providing effective remedies where candour is lacking!

To be clear, none of this is problematic. Providing assurances of candour, competence, quality and conduct does protect consumers and does allow clients to more safely retain licensees. But what is a new thought for me is that there is good self-interested reason for professions to provide these assurances because the alternative is reduced demand for professional services because consumers cannot easily differentiate between lemon and peach professionals.

The Access to Justice gap and market failure

As discussed at the outset, it is plausible that the access to justice gap is explicable in part by the choice to limit the provision of legal service to licensees and those directly supervised by licensees. If ordinary people don’t have sufficient information about the quality and cost of prospective lawyers, some will think it better simply to “lump it”, some will access other resources and some represent themselves.

It also plausible that the access to justice gap would be even worse if ordinary people did not have assurance of minimum competence, quality and conduct.

But it would be naïve to think that our minimum professional standards mean that there are no choices to be made between us. We know that is not true and that there are great, good and not-very-good licensed lawyers and paralegals. We know that prospective clients have limited ability to assess who is a good and who is a less good lawyer in general or for a particular problem. Clients have limited ability to assess whether they have received quality or substandard services.

What is interesting is the possibility that the access to justice gap may be, if only in part, explained by market failure arising from continuing information asymmetry despite minimum standards.

Said more simply, being a lemon is a relative thing[7]. While prospective clients have some assurance, prospective clients have limited ability to distinguish between lawyers. As a result, economic theory suggests that rational consumers are forced to assume that no lawyer is better than the minimum standard actually required. While perhaps not lemon standard, this standard is “lemonish”. Where a potential client is not able to sufficiently assess the quality of the professional or of the service provided, the amount that the potential client will be prepared to pay is limited or the potential client may not be willing to retain anyone at all”.

If this analysis is right then the answer may come from eBay. We should be considering how to provide better information and how to better address service problems.

The difficulty with this is that we professionals are conflicted. Where minimum professional standards are established, we all benefit because prospective clients see all of us in a better light. But where distinctions are drawn between us, some will be winners and some will be losers. And where distinctions are made based on imperfect information, some will be losers who ought not to be.

This reaction is seen in discussions about greater transparency in Law Society complaints and investigations. There is immediate unease when it is suggested that prospective clients have access to information about, for example, complaints rather than just about discipline proceedings.

There are other tools that might be considered. One is bringing an end to general practice by limited licensing, thereby requiring and signalling specific expertise.

In writing this column, I don’t claim to know what specific approaches make sense. But it does seem clear that information asymmetry is a “thing” and that it is particularly applicable in the legal services market and that market failure is a consequence of information asymmetry. It also seems clear that we should recognize that addressing information asymmetry through self-regulation will be challenging given the inherent competitive conflict within the professions.

If we are serious about the access to justice gap, we should accept that no one solution will slay the access dragon. Indeed, we have to accept that we cannot predict with confidence what solutions will be effective. But it is time to be creative and to actually attempt solutions.

And addressing the market for lemonish lawyers may be part of that. Better information may allow consumers to retain lawyers who otherwise would not.

And the added (and important advantage) would be that pressure to reduce quality to the lemonish levels would be reduced and those who provide higher quality would have a better prospect of being paid better prices where clients

[1] This column borrows heavily from Fisman and Sullivan: The Inner Lives of Markets: How people shape them and they shape us (2016 Pereus Books Group), https://www.amazon.ca/Inner-Lives-Markets-People-Shape/dp/1610394925

[2] I will refer to lawyers rather than lawyers and paralegals in the balance of this column for ease of reading. But the point is relevant for paralegals as much as for lawyers and perhaps more .

[3] Fisman and Sullivan supra., Chapter 3

[4] Quarterly Journal of Economics, 1970

[5] My thanks to Noel Semple for editing a draft of this column and pointing out the downward-spiral problem which seems highly relevant in some areas of the legal services market.

[6] Fisman and Sullivan supra., Chapter 3

[7] Strother v. 3464920 Canada Inc., [2007] 2 SCR 177 at para. 42

[8] Thanks again to Noel Semple for pointed out the following reference which notes that professional regulation ordinarily sees quality in yes/no terms. Ordinary licensing does not permit consumers to differentiate between licensees. Michael J. Trebilcock, Carolyn J. Tuohy and Alan D. Wolfson, Professional regulation : a staff study of accountancy, architecture, engineering and law in Ontario prepared for the Professional Organization Committee (Toronto: Ministry of the Attorney General, 1979) at pages 78-9: “all standard-setting mechanisms, including licensing, necessarily proceed on the assumption that quality is a discontinuous attribute. A licensing regime assumes that either one satisfies the required licensing conditions and provides a corresponding quality of service, or one does not meet the standards and is not permitted to provide any lesser quality of service on any terms. “

2 Comments

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2 responses to “Access to justice and market failure

  1. JASON MOYSE

    Choking out suppliers from even among the current pool of regulated providers would make things worse for those that matter (i.e. clients) according to economics 101.

    Moving from general to limited licensing would actually curtail the potential supply in certain practice areas. It’s regulation on top of regulation in a system that already assumes there is no way for alternatives to fill glaring market gaps.

    The (rather reliable) theory of supply and demand would provide that this would cause the price of lawyers to INCREASE for those areas — pushing access to justice further away.

    This is at least until such time as economically motivated lawyers then transitioned to be in the more lucrative limited licence bucket so as to ‘correct’ the previously buoyed market price for those services.

    Perhaps we’d end up with people tilting their careers toward a small number of preferred client types.

    This is the situation we have now — with 85% of legal needs being unmet despite there being way too many lawyers.

  2. Jason: Your point works if an operating market is assumed where supply and demand work as economic theory says they should. There is reason to doubt that in the market for legal services. The cause(s) of market failure are worth considering. The information asymmetry point is that a fear of lemons decreases demand thereby decreasing the volume of services supplied/consumed. What may be the right answer in an operating market may be the wrong answer in the case of market failure. To be clear, I’m hypothesizing that the lemonish lawyer is part of the problem. But it is useful to develop and assess hypotheses.

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