An economic analysis of expert credence good providers is useful for the layperson trying to understand the Midhurst Secondary Plan crisis.
Email from Springwater Township to Les Stewart:
From: Brad Sokach
Date: 24 Feb 2012
To: Brent, me, John, Council
Hello Mr. Stewart,
Outside of the OMB appeals I am not aware of the Township being a plaintiff or defendant on any matters related to the Midhurst Secondary Plan. I have asked the staff member who tracks claims against the municipality for confirmation and will advise if there are any claims related to the Plan.
Brad Sokach, P.Eng.
Director of Planning and Public Works
Township of Springwater
2231 Nursery Road
Minesing, ON L0L 1Y2
P. 705.728.4784 ext 2034
A. Credence Good
Legal advice is a credence good. To economists, credence goods are goods or services with the following 3 characteristics:
- the value is difficult or impossible for the buyer to determine accurately before they buy it,
- the buyer can’t know if it was useful [even after they did buy it] and
- the seller does know the value of #1 and #2 and therefore can exploit this ignorance for their own self-interest (ie. information asymmetry leads to opportunism risk). Wikipedia
Two academic references on credence good experts who cheat.
1. Dr. Gillian K. Hadfield, University of Southern California:
Economists refer to a good as a credence good if it is provided by an expert who also determines the buyer’s needs. Buyers of credence goods are unable to assess how much of the good or service they in fact need; nor can they assess whether or not the service was performed or how well. This puts buyers at risk of opportunistic behavior on the part of sellers: they may be sold too much of a service or billed for services not performed or performed poorly. Theoretical work on markets for credence goods predicts that markets for credence goods may be characterized by fraud (billing for unnecessary services or services not performed) and a price mark-up over cost…Legal services are credence goods… Free download: The Price of Law: How the Market for Lawyers Distorts the Justice System
2. Dr. Winand Emons, University of Bern:
With a credence good, consumers are never sure about the extent of the good that they actually need. Experts such as doctors and lawyers, as well as auto mechanics and appliance service-persons (the sellers) not only provide the services, but also act as the expert in determining the customer’s requirements. This information asymmetry between buyers and the seller creates strong incentives for the seller to cheat. Free download: Credence Good Monopolists
B. NPV (net present value) of Competing Clients
- An economically weak municipality in a minor county; next-to-zero repeat business potential
- Consortium of national-scale corporations that control thousands of acres of raw land within commuting distance of the largest residential market in Canada; 30 to 50 year time frame.
C. Conflict of Interest (reputation risk of real or perceived)
Conflicts of interest do arise in the business of practicing law. They just seldom arise in a public fashion such as here.
The dealers also named Cassels Brock & Blackwell as a defendant in the action, alleging the law firm was in a conflict of interest. The lawsuit alleges that at the same time Cassels was advising dealers of their legal rights during the wind-down, the firm was also representing the federal government during GM’s bailout negotiations.