The Value of an Attorney: Evidence from Changes to the Collateral Source Rule

One of the more contentious questions in law is the value of lawyers to their clients. Yet a simple comparison of recovery in cases with and without lawyers will not yield a satisfactory estimate of the value of an attorney since hiring a lawyer is endogenous. We utilize modifications to the collateral source rule which require that awards at trial be reduced by the amount of payments from first party insurance as an instrument. Theoretically these modifications to the collateral source rule reduce the likelihood a claimant will hire a lawyer and reduce the likelihood that the lawyer accepts the case. Consistent with our model the modification of the CS rule has a non-trivial effect on the probability of hiring attorneys. There is one problem with our candidate instrument; modifications to the CS rule that require offsets have a direct effect on recovery and hence violate the exogeneity requirement for a valid instrument. We propose an alternative estimator which bounds the impact of lawyers. We find that the upper and lower bounds of our estimated impact of hiring a lawyer are negative for one of our recovery measures and include zero for the other. The reduction in total payment received from hiring a lawyer range from over $230,879 to approximately $51,407 in 2002 constant dollars in contrast to a gain from hiring a lawyer of $22,963 to $33,614 when estimated using the conventional approach. We also estimate the quantile effect of hiring an attorney. Here the effect for all but the largest claims is close to zero with the estimated bounds typically straddling zero. However for the top 10% of claims we find very large negative impacts suggesting that lawyers actually reduce the client’s recovery relative to the amount they would have received without representation.