At fancy US corporate law firms, new lawyers, that is recent law school graduates, are called associates and are often paid in excess of $80,000. They are employed, among other tasks, to do “proof reading”. When a public offering is printed, first year associates are assigned the responsibility of going to the printer and staying up past midnight to proof-read documents as they come off the presses. The printed copies are checked for errors and compared with an original copy. Why does a law firm allocate its high priced labor in this way? Why doesn’t the law firm use secretaries of paralegals to do this job? Discuss the conditions, which make this system very effective.
Technology: Proof-reading items such as public offerings is dull and routine, but mistakes are very costly. Suppose paralegals are used and paid their opportunity cost; if a mistake is made, and they are fired, they go somewhere else and earn approximately the same salary.
Conditions which make this system very effective: potential loss of quasi-rents. If a first year associate makes a serious error and is fired, he will not be able to find a comparable job. This is because the labor market for first year associates at fancy law firms is very rigid; the jobs are granted only to third year law students at good law schools who will be graduating in June. The number of law firms, which pay such high salaries is relatively small. All of these factors make it very difficult for a dismissed first year associate to obtain a comparable job at another firm. This means that if an associate provides low quality services, which lead to his termination, then he will not be able to sell similar services in the future. The salary can be viewed in this context as a price premium, which ensures quality. The net impact: proof-reading may be boring, but do it very carefully. The law school education, along with good law school grades, are a non-salvageable investment, which the first year associate has made. Paralegals have not made comparable investments and their wages do not reflect comparable price premiums. This means that paralegals cannot credibly offer to provide the same care and the same high quality in proof-reading as first year associates.
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