One Weird Trick to Promote Persistent Information Asymmetry

When I first began researching the legal services market, I quickly became aware of the serious information asymmetry problem across the marketplace – especially for criminal defense. As I’ve probably mentioned before, defendants have no real way to estimate the quality of an attorney when considering hiring one for a criminal case (except obviously by consulting Blackstone Trial Analytics, LLC – the trusted name in attorney referrals and quantitative LSM analysis). This is a classic adverse selection problem. Defendants know (or can approximately make themselves aware of) the average outcome of a criminal charge; but they don’t know which attorneys contribute better than average outcomes and which contribute worse than average outcomes.

Ultimately, attorneys seem to set roughly comparable prices for their services and share the market. Of course many defendants would like to pay more for high quality attorneys and probably all defendants would like to avoid low quality attorneys (at least at the prevailing prices). I wondered why (high quality) attorneys didn’t try to solve this problem. They could, for example, publicize their records. But this wouldn’t work if many other attorneys simply didn’t publicize their own records. Probably the public would have a hard time interpreting the record in the context of suppliers of criminal defense services generally. This is especially true if people systematically overrate their probability of success at trial.

More plausibly, I thought, attorneys could make their fees contingent on case outcomes. For example, they could charge some variable amount (by quality) for plea bargains and more for trials – much more where the defendant wins. Obviously any specific deal is possible, including zero or even negative fees. These arrangements, I thought, would probably produce few poor incentives, remove some bad existing incentives and communicate important facts about quality to defendants.

Generally, when there appears to be an obvious and easy solution to fix an apparent market failure, a non-market failure lurks just behind it. This is one of those cases. Here’s the relevant ABA rule:

(d) A lawyer shall not enter into an arrangement for, charge, or collect:

(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or

(2) a contingent fee for representing a defendant in a criminal case

 

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Claims About Monetary Policy

Sometimes it seems that virtually all claims about monetary policy are either incoherent or wrong. Take for example the following comments from a recent Washington Post article about the Fed:

  1. “LOL
    The FED never got us out of any recession, it’s Still here. The FED caused the last recession, why on earth would it fix it. GDP is a sham as the numbers are very cooked. Unemployment numbers are cooked and well stirred. Inflation is at 8% and this is brought to you by FED / Global government in conjunction with Corrupt government overspending and a complicit PRESS who lies and misleads on a daily basis.”
  2. “Want to improve economic growth? Start with reeling in Big Pharma. A few Epipens cost Thousands of dollars that could be used to purchase goods and services throughout the whole economy instead of being used to enrich a handful of greedy execs.”

The first case is obviously incoherent. Ayer would call this “literal nonsense.” How must the commenter view the world for his view to be correct? GDP is a “sham” and the numbers are “very cooked”; of course if this is true we would expect the government (given broad latitude over GDP figures) to release more robust figures. Ditto for unemployment numbers. The entire last sentence is unfalsifiable/silly.

The second case is an example of just being plain wrong. The commenter is probably relying on some idea that consumption is an “important” component of aggregate demand and investment is a trivial component. The commenter’s theory is at least testable.

Obviously these comments are from laypeople unschooled in macroeconomic theory. I suppose we can forgive them, although I find that intellectually unsatisfying. At any rate, it’s more surprising when you see this from real economists.

John P. Hussman argues for the following view of monetary policy:

hussman

Remembering the Quantity Theory of Money (QTM):

MV=Py

Velocity is defined as Py (nominal GDP) over M (money supply).

The only way V could fall in direct proportion to the rise in M is if increasing M had no effect on nominal GDP (NGDP). In other words, we drop the classical advice that nominals only effect nominals and replace this with nominals only effect reals.  Hussman’s story is further complicated by the fact that markets actually react to increases in the monetary base as if they are expansionary (they are). If the announcement of an increase in the monetary base causes asset prices to rise, NGDP has increased.

Honestly, I’m not sure how Hussman’s graph was constructed. A graph of the size of the (indexed) monetary base versus M1 velocity is reproduced below:

fredgraph (3)

I think the “dogmatic monetarist” story looks more plausible.

Juries: 12 Increasingly Angry Men

One of the most enjoyable things about economic analysis is that it often yields surprising facts about cherished institutions. For example, the jury selection process in the United States probably burdens defendants disproportionately in criminal trials – most people believe jury selection serves to mitigate the problem of biased juries.

Why? Imagine the distribution of jurors by how sympathetic they are to the defendant. I would guess the distribution isn’t normal with a mean of “indifferent”; instead, the average juror probably starts from a relatively unsympathetic position. Assume for a particular defendant, 60% of the population has some bias against the defendant and 40% has some bias in favor. If the jury is randomly selected, we would expect 6/10 jurors to be relatively anti-defendant. If the prosecutor and defense attorney can identify the jurors biases and are allowed one challenge each, the final jury should be 6.2/10 anti-defendant. Every additional challenge increases the frequency of anti-defendant jurors in the panel.

Apparently Scots law embraces (wisely, I think) random jury selection. The quotation below is from Peter Duff’s “The Scottish Criminal Jury: A Very Peculiar Institution”:

There is no equivalent to the voir dire procedure in Scotland, a fact which might surprise some American readers. The strong opposition of the Scottish criminal justice system to any procedure of this type is well illustrated by the observations of the Appeal Court in McCadden v. H. M. Advocate:

There may never be a process which eliminates the possibility of personal prejudices existing among jurors, the nearest practical one (and it is not foolproof) being possibly the “vetting” of jurors, a system against which the law of Scotland has steadfastly closed the doors. Evidence of how it is used and abused in countries in which it is operated only tends to confirm the wisdom of that decision.

The court went on to observe that it should not be “lightly assumed” that jurors will pursue their prejudices in defiance of their oath and the directions of the judge. On a more practical note, the court pointed out that the broad base from which jurors are drawn means that any prejudices and biases tend to cancel each other out, and further, that the majority verdict, whereby a bare eight to-seven vote either way suffices, ensures that it is unlikely that one prejudiced juror can affect the outcome of the case.

Miscellaneous Articles

Below are a few interesting articles for those interested in LSM theory or empirical work (they are in no particular order):

Akerlof, The Market for “Lemons”: Quality, Uncertainty and the Market Mechanism

The seminal work on adverse selection.

Jennifer Bennett Shinall, Slipping Away from Justice: The Effect of Attorney Skill on Trial Outcomes

Where the author gets close to living in living in my ratex prosecutor world. I’ll write about this paper (and Abrams and Yoon)

Abrams and Yoon, The Luck of the Draw: Using Random Case Assignment to Investigate Attorney Ability

Investigating attorney ability.

Roach, Indigent Defense Counsel, Attorney Quality, and Defendant Outcomes

Kahan, Hoffman, Evans, Devins, Lucci and Cheng, “Ideology” or “Situation Sense”? An Experimental Investigation of Motivated Reasoning and Professional Judgment

Landes, An Economic Analysis of the Courts

Baker and Mezzetti, Prosecutorial Resources, Plea Bargaining, and the Decision to Go to Trial

Weimer, Plea Bargaining and the Decision to go to Trial: The Application of a Rational Choice Model

Yang, Resource Constraints and the Criminal Justice System: Evidence from Judicial Vacancies