Contracts Meet Henry Ford

Legal scholars and legal educators view contracts as a welfare-maximizing (or optimal risk-allocating) device for two or more parties. Because we cling to this principal-driven paradigm, we think of lawyers only as the proverbial “transaction cost engineers,” the loyal agents of parties to a transaction. And whenever we observe contracts that appear to be suboptimal, we blame agency costs. We instead should apply the literature on organizational economics to understand the production of contracts by the modern law firm.

This literature better illustrates how law firms organize, why they produce the products they do, and why those products sometimes exhibit strangely inefficient features. These inefficiencies are not the consequence of agency costs or a lack of attorneys’ fidelity to their clients; they instead illustrate the limits — and, indirectly, the strengths — of large organizations. Indeed, observing that legal products do not perfectly match contemporary needs might be no less provocative than observing that Detroit is long overdue to produce high-mileage cars.