Reputational Economies of Scale, with Application to Law Firms

Edward M. Iacobucci

American Law and Economics Review, 2012, vol. 14, issue 1, 302-329

Abstract: In some circumstances, increasing the number of products it sells improves a firm's incentives to maintain a reputation for high quality. There is a trade-off from increasing scale that must be accounted for in any theory of firm size and reputation. The more products sold, all things equal, the more the firm has to gain in the long run from preserving a reputation for high quality. On the other hand, the more products sold, the greater the potential short-run gain from providing low quality. This article focuses on a natural assumption to explain why in many cases the longer run considerations dominate: asymmetric performance. If, for example, the products a firm sells are sold nonsimultaneously, then the entire reputation of the firm is on the line from the sale of only a subset of its products. This article explains the importance of asymmetric performance for reputational economies of scale. The logic applies to law firm structure, suggesting that larger law firms have reputational advantages. It also helps to explain why partners tend to share profits among themselves. Existing empirical evidence about firm reputation and profit sharing is consistent with the theory. Copyright 2012, Oxford University Press.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1093/aler/ahr023 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:amlawe:v:14:y:2012:i:1:p:302-329

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

American Law and Economics Review is currently edited by J.J. Prescott and Albert Choi

More articles in American Law and Economics Review from American Law and Economics Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().