Conflicts of interest, ethical standards, and competition in legal services†

Abstract We study how the legal profession manages representational conflicts of interest. These conflicts arise when a single law firm represents clients with opposing interests, threatening to undermine the legal process and, ultimately, social welfare. We argue that current ethical standards, emphasizing disqualification, may actually worsen the clients’ situation. Instead, the clients’ interests are today mainly safeguarded by law firms being small, reducing the incidence of conflicts. Despite low market concentration, law firms enjoy high earnings as representational conflicts create negative network externalities at the firm level. These profits are sustained in the long run as entry occurs through firm split-ups.