A Signaling Model of a Lawyer with Private Information About Her Talent

Abstract

I examine the incentives and effort choices of lawyers that reflect their anticipation that those perceived as high-talent lawyers will be able to command higher fees in future contracts they are offered by the observers of their effort levels. The analysis employs three versions of a two-type (high or low talent) signaling model of a lawyer with private information about her talent. Each version involves a long-run monetary payoff that is a function of effort, type, and believed type. These payoff functions are constructed to examine how private information about talent might affect the probability of winning at trial and/or the cost of effort. For each model version, I find the full-information equilibrium, the conditions under which the full-information equilibrium provides a separating equilibrium under asymmetric information, and the effort levels that provide a separating equilibrium under asymmetric information. Finally, I examine two versions of a continuum-type model so as to verify the robustness of the two-type model’s results.

Keywords: Signaling, Lawyer's Incentives, Talent, Effort, Separating Equilibrium

JEL Classification: K41, D82, L84