Advocatus, Et Non Latro?: Testing the Excess of Litigation in the Italian Courts of Justice
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View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by LSE Research Online Paolo Buonanno and Matteo M. Galizzi Advocatus, et non latro?: testing the excess of litigation in the Italian courts of justice Article (Published version) (Refereed) Original citation: Buonanno, Paolo and Galizzi, Matteo M. (2014) Advocatus, et non latro?: testing the excess of litigation in the Italian courts of justice. Review of Law & Economics, 10 (3). pp. 285-322. ISSN 2194-6000 DOI: 10.1515/rle-2014-0022 © 2014 Walter de Gruyter GmbH This version available at: http://eprints.lse.ac.uk/60800/ Available in LSE Research Online: March 2015 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. Rev. Law Econ. 2014; 10(3): 285–322 Article Paolo Buonanno* and Matteo M. Galizzi Advocatus, et non Latro? Testing the Excess of Litigation in the Italian Courts of Justice Abstract: We explore the causality relationship between litigation rates and the number of lawyers, drawing on an original panel dataset for the 169 Italian first- instance courts of justice between 2000 and 2007. In this time period, both the number of lawyers and the civil litigation rate sharply increased, and a mandatory minimum fee was in place for lawyers’ services. We first document that the number of lawyers is positively correlated with different measures of the litigation rate. Then, using an instrumental variables strategy, we find that a 10% increase in lawyers over population is associated with an increase between 1.6 and 6% in civil litigation rates. Our empirical analysis supports the supplier-induced demand (SID) hypothesis for Italian lawyers: following a sharp increase in the number of lawyers, and in the impossibility of competing on price because of the minimum fee regula- tion, some lawyers may have opportunistically used their informational advantage to induce their clients to bring lawsuits into court more often than would have been optimal if they were acting in the exclusive interest of their clients. Keywords: lawyers, litigation rates, credence goods JEL Classification: H41, J44, K41 DOI 10.1515/rle-2014-0022 Sanctus Ivo erat Brito Advocatus et non latro Res miranda populo Saint Ivo was Breton A lawyer and not a thief A marvellous thing to the people. (From the inscription in Treguier on the alleged grave of Saint Ivo of Kermartin, patron saint of lawyers, a lawyer himself.) *Corresponding author: Paolo Buonanno, Department of Economics, University of Bergamo, Via dei Caniana 2, Bergamo, Italy, E-mail: [email protected] Matteo M. Galizzi, Department of Social Policy, London School of Economics, Cowdray House, Houghton Street, London, UK; School of Law, University of Brescia, Via San Faustino 41, Brescia, Italy, E-mail: [email protected] Brought to you by | London School of Economics and Political Science Authenticated Download Date | 3/9/15 12:32 PM 286 P. Buonanno and M. M. Galizzi 1 Motivation Italy is quite rarely at the top of international rankings. In few other fields can it exhibit as impressive a collection of records as in the international comparison of judicial systems. Italy is the European country with the highest absolute number of both incoming and pending civil proceedings in courts. It is also one of the European countries with the highest number of lawyers per 100,000 inhabitants: 290, compared to the 168 of Germany, 76 of France, and 22 of England (CEPEJ, 2008). When looking at the data, what is most surprising is the impressive rate at which the number of lawyers has increased in the last decades: according to the body which runs the Italian lawyers’ social security scheme (Cassa Nazionale Forense), lawyers have more than tripled in Italy, jumping from 42,366 in 1990 to 143,976 professionals in 2008 (þ 239.84%). In just 7 years (2000–2007) the number of lawyers has risen from 82,637 to 136,750 professionals (þ 65.47%). Surprisingly, this jump in the number of lawyers occurred in a period when the national GDP was increasing at one of the lowest rates since the Second World War (IMF, 2012). Over the same period, the litigation rate, measured by the number of first-instance ordinary civil proceedings per 1,000 inhabitants, has also significantly increased: incoming proceedings rose from 524.3 per 100,000 inhabitants in 1990 to 658.8 in 2007 (þ 25.7%), while pending proceedings passed from 804.8 per 100,000 inhabitants in 1990 to as many as 1,644.7 in 2007 (þ 104.4%).1 As Figure 1 shows, the correlation between the number of lawyers operating in each of the 169 first-instance Italian courts of justice and the litigation rate in each province is strongly positive.2 In this work, we explicitly test the supplier-induced demand (SID) hypoth- esis for the Italian courts of justice in the years between 2000 and 2007, a period when more than 50,000 new lawyers entered the market. In analogy to what has often been found for medical professionals in the health economics literature, we hypothesize that the high number of lawyers competing for cases in a court of justice, together with the impossibility of competing on price because of the minimum fee regulation, could lead some lawyers to opportunistically take advantage of their informational advantage to “induce” their clients to bring 1 It is worth noticing, as in Marchesi (2003), that the ratio between pending proceedings and incoming proceedings passed from 363.7 in 2000 to 249.7 in 2007. 2 The correlation between the number of lawyers per 1,000 inhabitants and the litigation rate is 0.483 and it is significant at the 1% level. Brought to you by | London School of Economics and Political Science Authenticated Download Date | 3/9/15 12:32 PM Testing the Excess of Litigation in the Italian Courts of Justice 287 Figure 1: Correlation between lawyers and total litigation rate by province (average 2000–2007) lawsuits before a court more often than would be optimal when acting in the exclusive interest of their clients. Using an original provincial-level dataset, we first exploit the panel struc- ture of the data to estimate a model, which allows for both province- and time- fixed effects, while controlling for a wide range of covariates and control vari- ables, including the number of judges in the court, and major socio-demo- graphic and economic characteristics of the province, such as the levels of GDP, employment rate, education, population density, urbanization rate, and social capital. To address the causality relation, we then employ a two-stage- least-squared (2SLS) approach and consider two instrumental variables that are correlated with the number of lawyers in the province, but uncorrelated with unobserved factors that can affect litigation. The first instrument, based on the methodology proposed by Card (1993), is the 8-year lagged average proximity of the province to the three closest university colleges offering law courses neces- sary to become a lawyer. The second “historical” instrument is the provincial proximity to a law School founded in the Middle Ages. Our main result is that the number of lawyers operating in a court does indeed exert a positive and statistically significant effect on the litigation Brought to you by | London School of Economics and Political Science Authenticated Download Date | 3/9/15 12:32 PM 288 P. Buonanno and M. M. Galizzi rate. A 10% increase in the number of lawyers over the population is associated with a 1.6–6% increase in litigation rates. This effect is robust across several specifications and checks, both on the control variables and on the instruments. Our results thus support the SID hypothesis for the Italian courts of justice for the years 2000–2007, a period of time where massive inflows of new lawyers entered the market and a mandatory minimum fee regulation was in place. In those years, the minimum fees for services may have prevented lawyers from responding to tougher competition by adjusting their prices, as would have occurred in a competitive market setting. As a consequence, some lawyers may have reacted to the higher pressure on the supply side by succumbing more often to the temptation of using their informa- tional advantage in an opportunistic way, by inducing part of the demand for legal services from their clients. This induced demand could have resulted in an inflation of the number of lawsuits brought before the courts and thus of the litigation rates. Our work is organized as follows. Section 2 discusses the main character- istics of the organization of justice and the legal profession in Italy. Section 3 describes the data and the variables used in our empirical estimates. Section 4 reports the empirical strategy and the estimation results, while Section 5 pre- sents the robustness checks. Section 6 discusses some background for the present work, and, in particular, relates our evidence to the institutional context in Italy and to previous findings in the literatures in law and economics and health economics. It also contains a discussion on how the conceptual frame- work traditionally used by the health economics literature to analyze SID can be adjusted to account for the presence of minimum fees for services in the market.