Lawyers and Investment

This paper presents a model of lawyers and investment. Investors use litigation to enforce their financial contracts with entrepreneurs. Litigation is modeled as a contest in which both agents hire lawyers to increase their probability of winning the trial. The issue and the cost of the contest determine how much investors are willing to lend. The model predicts that (i) more lawyers are hired if judicial efficiency is lower or damages are higher; (ii) higher judicial efficiency, higher damages, and tighter restrictions on the supply of lawyers benefit investment. Thus, the number of lawyers can be negatively correlated with economic activity even though lawyers are assumed to be productive.