Thursday, August 23, 2007

Law Schools and Competitive Markets

I think there is an analogy here but, if not, the message and the question for moneylaw advocates is the same. One of the issues that came up in airline and trucking deregulation was whether competition would lead to lower safety. The idea was that lower prices would mean cost cutting. The neoclassical economist's answer was to discount this by noting that the profit motive -- in the interest of shareholders -- would have already led to cutting costs as much as possible.

Now switch to law schools or any school in the middle of a budget crunch. The argument similar to the less airline safety argument is that the budget crunch will affect the quality of the law school. Less revenue means lower "safety." This, however, requires one to assume that before the crunch spending would have been cut to the lowest possible level consistent with the interests of shareholders.

I do not know the outcome as an empirical matter when it comes to transportation deregulation but everyone who is at a school that is going, has or will go through a budget crunch has a chance to test the theory about whether the school was operated in the interest of shareholders before the cuts. Let's say the snacks in the lounge are less lavish, the travel budgets a bit smaller, there are fewer "free lunches," not as many luncheon speakers, a couple of unfilled faculty positions and that faculty are asked to teach a few more students or a few more hours, and so on. Are shareholders worse off? Maybe there are some connections between luxuries for the faculty and the welfare to stakeholders but a budget crunch can also reveal how tenuous that connection may be and how cavalier schools can be when spending the money of others.

So, the moneylaw question is how much the operation of a public law school can, as far as cost cutting, resemble a firm in a competitive industry?

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