TCS Daily

Legal Sex Tournaments

By Stephen Bainbridge - April 6, 2006 12:00 AM

Although women now comprise half of law students and a third of practicing lawyers, they still account for less than 20 percent of large law firm partners. Some of this disparity doubtless can be attributed to glass ceilings, mommy tracks, and the other usual discrimination suspects. Yet, given the considerable inroads diversity policies and political correctness generally have made in big law firms, one suspects something else may also be going on.

The path to partnership in large firms can be understood as a promotion tournament. Many service firms use such tournaments as a mechanism for reducing agency costs through "comparative performance evaluation." In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status. In law firms, associates are ranked and the best performers are promoted to partner at the end of an evaluation period.

For law firms, the promotion-to-partner tournament solves two agency cost problems at a single stroke. On the one hand, the firm makes investments in its associates' human capital -- i.e., skills and client relationships -- during their apprenticeship. The firm will want to discourage associates from leaving the firm before it has fully amortized those investments. On the other hand, the firm must also deter shirking by associates.

The firm gives associates incentive both to remain for the optimal period and to maximize their productivity during that period by holding "a tournament in which all the associates in a particular entering class compete and the firm awards the prize of partnership to the top alpha (?) percent of the contestants." The prize of promotion to a more secure and higher status position, plus the accompanying increase in compensation, gives lawyers an incentive to remain at the firm.

Conversely, the threat of losing the tournament deters shirking. A lawyer who fails to win the tournament loses more than just the opportunity for future wealth and status gains. Lawyers make substantial investments in client-specific human capital by developing relationships with the client and familiarizing themselves with the client's business. Because the investment is specific to the particular client, it will be lost if the relationship ends. Hence, the lawyer has a strong incentive to maintain that relationship.

Tournaments are highly risky. Only a small percentage of entering first year associates survive the winnowing process. Even among those who make it through the probationary period to the final promotion decision, a significant number are often denied partnership.

Winning the tournament, moreover, no longer ends the survival of the fittest competition. In recent years, law firms have shifted away from compensating partners on the basis of seniority to an "eat what you kill" model in which compensation is variable and partners lack job security.

Partners whose compensation is based on their continuing ability to attract clients and generate billings are inherently vulnerable to factors over which they have little or no control, such as market conditions, mergers in which clients are acquired, and so on. Yet, unless the partner is able both to maximize her own billings and generate ongoing business to support a team of associates and staff, she is likely to be terminated. Hence, as legal ethics expert Milton Regan put it, "A partner subject to an 'eat-what-you-kill' system may be anxious about where her next meal is coming from."

The likely significance of these risk factors follows from the considerable body of evidence that women are more risk-averse than men. Economist Vickie Bajtelsmit summarizes this research as follows:

"Anecdotal evidence suggests that women are more risk averse than men. A number of studies have confirmed this finding even when controlling for the effects of other individual characteristics such as age, education, and wealth. Jianakoplos and Bernasek ... single women were relatively more risk averse than single men and married couples. The proportion held in risky assets was found to increase with wealth (DRRA) but for single women the effect was significantly smaller than for single men and married couples. ...

"Other studies have explored gender differences in risk aversion in the context of non-financial decisions. These studies also find evidence of women's greater risk aversion. Hersch finds that, on average, women made safer choices than men in a number of risky consumer decisions such as smoking, seat belt use, preventative dental care and having regular blood pressure checks. Hersch looks at gender- specific estimates of illness and injury incidence rates for different industries and occupations and concludes that women are more risk averse than men based on the observation that women are paid a higher compensating wage differential for accepting a given job-injury risk. Brinig, analyzing data on speeding convictions, finds that women appear to be less willing than men to be caught and convicted of speeding."

This research suggests that self-sorting on the basis of risk preferences may explain at least part of the lingering gender disparities among large law firm partners. This inference finds some support in a recent study by Muriel Niederle and Lise Vesterlund, which found that women seek to avoid competition, which may help explain why they are less likely to obtain promotions and more lucrative jobs.

Niederle and Vesterlund asked 80 paid volunteers to perform a series of tasks. The volunteers were paid on a non-competitive piece rate for performing the first task. For the second task, however, payment was based on a competitive "tournament" in which the winners took all and losers received no payment. In the third trial, participants were allowed to choose whether they would be paid on a noncompetitive or tournament basis.

Niederle and Vesterlund found that, "when allowed to choose compensation rates for the third task, 75 percent of the men chose tournament compensation while only 35 percent of the women did so. When the authors compare men and women with the same performance in the second-task tournament, the women have about a 38 percent lower probability of entering the subsequent tournament than the men." The conclusion?

"In this experiment, large gender differences in tournament entry can be observed, even in a case where women are as good as men, where discrimination is absent, and where the time spent on each task is limited, so that time conflicts with raising children are not an issue."

Although Niederle and Vesterlund discount the extent to which risk aversion fully explains their results, their study has obvious implications for large law firm practice. Along with the more general evidence of gender differences in risk aversion, their findings strongly suggest that women will tend to be averse to participation in the promotion tournament and the eat what you kill compensation schemes that dominate large law firm practice.

If this analysis is correct, an obvious normative implication is that one cannot naively ascribe the continuing gender disparity among large law firm partners to either intentional or subconscious discrimination. Instead, it follows in part from an inherent conflict between gender differences and the institutional structures of modern legal practice. Put another way, changing hearts and minds will be unavailing, so long as lawyers are chosen on the basis of promotion tournaments and obliged to eat what they kill.

Stephen Bainbridge teaches law at UCLA and writes a weekly column for TCS.



So What!?!?!?
We have too many lawyers as it is. What do say we drown 50% of the males and open up the opportunities for women? We's accomplish two things --- equality for women in law firms (big deal) and getting rid of a big waste of oxygen (a REALLY BIG DEAL).

Firm level survival
The real question in my mind is whether firms of the type described here are better or worse than other types of firms that might organize in a manner more beneficial to women's participation. It is possible that a general male machismo among lawyers created an environment hostile to participation by men or women who are not so competitive.
Firms organized on a less competitive and more cooperative basis may be more effective in delivering service to clients in general. All of us potential clients might be better off if cooperative law firms predominated, but we'll never know because the viciously competitive law firms will continue to drive them out of existence.

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