When Markets Attack!: Kevin Drum Snags One on Lawyers’ Starting Salaries

When 15 large law firms each believe that the stakes are very high in their hiring “the best” first-year associates–and also believe that they and their peers can successfully identify “the best” first-year associates, this is what happens:

A very nice and impressive demonstration of market failure–the kind of thing to make George Akerlof’s heart go pit-a-pat. Not a situation in which the competitive market is doing very well as a societal computation and allocation mechanism, is it?

Kevin Drum Starting Salaries for Attorneys Are Pretty Weird comments:

Via Tyler Cowen, here’s a chart of starting salaries for attorneys from Peter Turchin. It shows what’s now a fairly familiar bimodal distribution…. This bimodal distribution didn’t exist 20 years ago…. What I’m curious about is how sharp the second peak is. It’s not really a second distribution at all. Nearly 20 percent of starting attorneys belong to the super-elite group that gets high pay, but they all get exactly the same high pay: $160,000. Why is that? Can it really be the case that all of these super elites are precisely as elite as each other? Is there really not even a whit of sub-competition for this lucky 20 percent that would produce a few of them getting $180,000 or $200,000?…

Based on comments, the answer seems, indeed, to be “weird cultural collusion among top law firms.” Except that it’s not really all that weird. It’s like one gas station lowering its price and suddenly all the other gas stations on the same corner start charging the exact same price. There are only a few dozen super-elite law firms, and they pretty much all offer the exact same super-elite starting salaries. From comments:

The Commentor: The primary reason for the spike is that large law firms have a herd mentality. No one wants to be below the market when recruiting from the 14 or so schools we all recruit from