Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: We study how the legal profession manages representational conflicts of interest. Such conflicts arise when the same law firm represents clients with adverse interests. They may compromise the legal process, ultimately jeopardizing social welfare. We argue that current ethical standards, emphasizing disqualification over Chinese walls, may actually worsen the clients’ situation. Instead, the clients’ interests are today mainly protected by law firms being small. Despite low market concentration, law firms enjoy high earnings as representational conflicts create negative network externalities at the firm level. These profits are not eroded even in the long run as entry occurs through firm splitups.

Keywords: law firms; professional services; dual representation; representational conflicts of interest; ethical standards; Chinese walls; recusals; negative network externalities; competition; self-regulation

JEL-codes: K40; L13; L22; L44; L84

Language: English

57 pages, First version: April 2022. Revised: October 2022.

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