The Value of an Attorney: Collateral Source Rule Changes as an Invalid Instrument

Abstract

ABSTRACT The value of lawyers to their clients is notoriously difficult to estimate because of endogeneity. We utilize modifications to the collateral source (CS) rule that require reducing trial awards by the amount of payments from first‐party insurance as an instrument for hiring a lawyer. The problem with our instrument is that modifications to the CS rule have a direct effect on recovery and, hence, violate the exclusion restriction required for a valid instrument. We develop a new identification and estimation method that uses CS rule changes as an invalid instrument and bounds the impact of lawyers. We find that our estimated impact's upper and lower bounds are lower than estimates that do not correct for endogeneity. Our estimates of the impact of lawyers on total payment are consistently negative, although not precise enough to claim statistical significance. The upper bound of the effect of hiring a lawyer on total payment received is negative after fees in our preferred specification. This suggests that even in the most optimistic scenario, lawyers appear to reduce total recovery.