Uncorporated Professionals

56 Pages Posted: 8 Sep 2004  

John Romley

Price School of Public Policy, University of Southern California

Eric L. Talley

Columbia University - School of Law

Date Written: September 3, 2004

Abstract

Professional service providers who wish to organize as multi-person firms have historically been limited to the partnership form. Such organizational forms trade the benefit of risk diversification off against the costs of diluted incentives and liability exposure in choosing their optimal size. More recently, states have permitted limited-liability entities that combine the simplicity, flexibility and tax advantages of a partnership with the liability shield of a corporation. We develop a game theoretic model of professional-firm organization that integrates the provision of incentives in a multi-person firm with the choice of business form. We then test the model's predictions with a new longitudinal data set on American law firms. Consistent with our predictions, initial firm size is a strong positive predictor of subsequent conversion to a new limited-liability form. Also consistent with our theory, growth rate of small converters substantially exceeds that of larger adopters; large converters grow more robustly than non-adopters, however. These findings suggest that while the promulgation of new organizational forms has stimulated growth in the legal services industry, the principal beneficiaries of this growth have been large, well established firms rather than small, entrepreneurial, boutique practices.

Suggested Citation

Romley, John and Talley, Eric L., Uncorporated Professionals (September 3, 2004). USC Law and Economics Research Paper No. 04-22; and USC CLEO Research Paper No. C04-18. Available at SSRN: https://ssrn.com/abstract=587982 or http://dx.doi.org/10.2139/ssrn.587982

John Romley (Contact Author)

Price School of Public Policy, University of Southern California ( email )

USC Schaeffer Center, Verna & Peter Dauterive Hall
635 Downey Way
Los Angeles, CA CA 90089-3333
United States

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

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