Market Irrationality in the Law School 'Arms Race'

In Sunday's New York Times, David Segal correctly identifies so-called "merit" scholarships -- tuition discounts given to students with high LSAT or grades in order to induce them to attend a particular law school -- as a serious problem for students. But the story is headlined "How Law Students Lose ... as Law Schools Win." This is wrong.

In fact, everyone loses. These discounts ought to be banned as illegal price discrimination. As long as they are permitted and US News and World Reports rankings remain influential, Adam Smith's invisible hand of the market will lead students and law schools alike to act in ways that make us all worse off.

"Merit" scholarships should more properly be called "US News & World Report Ranking Rebate Fees": schools give them because they need to maintain entering class GPA and LSATs in order avoid sinking in the USNWR rankings -- not because they believe recipients are likely to be better law students or happier, competent, just or successful lawyers.

Employers hire young lawyers based mainly on potential, and potential is notoriously difficult to assess -- as Yogi Berra says, predictions are hard, especially about the future. USNWR, however, offers simplistic rankings of law schools that allow any hiring partner an easy way to sort applicants and a clear excuse if a hire turns out to be a mistake -- if you hire a student from a highly ranked school and he turns out to be a mistake, it is the school's fault, not the hiring partner's. That makes USNWR key in the entry level hiring market for lawyers. So students who go to higher ranked schools have an easier time getting jobs, and schools that place students well have an easier time attracting students, faculty and alumni contributions.

The result is that USNWR's rankings quickly become a self-fulfilling prophecy. Schools that learn how to play the rankings game attract the students, faculty and money necessary to make real improvements, while schools that don't -- don't. Any school that dares to ignore the USNWR rankings risks a death spiral of rapidly departing employers, students and faculty, leading to lower ranking and even more problems.

Unfortunately, rankings are a zero sum game: if everyone learns to game them, no one can get a competitive advantage. Instead, like Alice in Wonderland's Red Queen, who had to run as fast as she could just to stay in one place, schools feel coerced to spend ever greater sums on whatever USNWR measures just to stay in the same place. And that means increasing tuition in order to offer large discounts to students whose numbers increase the average that USNWR reports.

The consequence is a market-induced disaster.

Students lose -- but not primarily because of the issue David Segal identifies, that students who get unexpectedly low grades unexpectedly lose their scholarships. Instead, students, faculty, the profession and the justice system suffer because competition for USNWR rank leads schools to abandon core aspects of their mission.

First, USNWR rankings distort admissions. No admissions officer would place as much weight on undergraduate grade point averages and LSAT scores as USNWR does. Grades need to be interpreted, not averaged: only a news magazine on a limited budget would treat an "A" in Military Marching from a local community college as a better predictor of legal acumen than a "B" in Organic Chemistry or Ethics from Harvard.

Even more critically, no one gets better undergraduate grades or LSATs for actually wanting to be a lawyer or having the personality traits likely to predict success or happiness in the field, for being committed to justice or wanting to practice in an essential underserved area of the law, or for having the interests and learning style best fitted to a particular school's strengths.

But law schools need their graduates to get jobs, and graduates' ability to get jobs depends on the law school's USNWR rankings. So once some schools decided to get a competitive advantage in the rankings by over-weighting LSATs and grades -- admitting candidates solely because their numbers will improve the school's USNWR rank -- other schools had no choice but to do the same.

And similarly, once some schools decided to shift financial aid to offering tuition rebates to attract students with higher LSATs and grades, the same pressures forced the others to follow along. Today, schools spend vast sums -- Ranking Rebates are the largest budget item at some law schools -- in order to attract students who aren't even the students they really want or are best able to serve.

Second, the market for school rank damages the strongest part of the law school curriculum -- the first year -- and the relationships that underpin the later years.

Most obviously, the threat of losing grants leads students to focus on grades rather than education, and on competition rather than cooperation. Students learn best when they learn together; this is never true more than in law, which is best approached as an ongoing conversation about how we, as a nation, want to live together. Students must join the conversation -- debate the law -- in order to understand it. And students need to learn to work together: law, like most professions, is practiced in groups. But grade-grubbing leads students to see their colleagues as competitive threats, not cooperative assets. Everyone loses.

Slightly more subtly, the first year is where students develop the relationships and skills that faculty and fellow students use to identify leadership strengths and weaknesses that need to be addressed. But the ranking system means that students who do well are tempted to transfer to higher-ranked schools, at the cost of the relationships they've made, the leadership positions they should have assumed and the quality of their education (and, of course, their scholarships). A few highly ranked schools are well-known for using this to game the ranking system: they accept small first year classes (to score better on USNWR's calculations of their entering class GPA and LSATs) and then add lots of second year transfer students (who don't affect USNWR rank) to make the budget balance. Mid-ranked schools, in contrast, replace the top students who leave with similar students from slightly lower ranked schools, but the loss of community, relationships and cooperation hurts everyone. The resulting churn hurts education and morale with no compensating benefit.

Third, the zero-sum competition for rank distorts law school budgets in irrational ways. Instead of using tuition to educate or research or run clinics or help students find jobs, the ranking game leads law schools to spend it on Ranking Rebates to run as fast as they can just to maintain their relative position. If Ranking Rebates were illegal, or if USNWR lost its influence today, many law schools could drop their tuition by a third tomorrow and leave their budgets better off.

Students would be better off if they could focus more on education and less on grades, if they expected to spend three years at one school with colleagues who were doing the same, if they were better able to plan their tuition expenses, and if they had colleagues who were happy rather than disappointed (at having lost a grant) or isolated and frustrated (at having been abandoned or having chosen to abandon personal connections in pursuit of a slightly better chance at a job).

The problem is the natural result of a badly regulated market and the solution is to fix the regulation.

When customers know less than providers, increased competition always, inevitably, focuses on appearances instead of reality. That is why the professions used to self-organize in the days before Market Idolatry: to ensure that those who actually know what best practices are were in a position to do something about it. Properly structured markets align individual interests with collective ones, so that the invisible hand guides people pursuing what is most advantageous individually to do what is best socially. But this does not happen by magic. It requires sound regulation to ensure that providers and their clients focus on quality rather than -- as here -- the appearance of quality.

Law faculty and law students, in general, understand that the system is broken. So do lawyers, who report massive unhappiness in the profession. We even know what to do about it -- focus less on LSATs and grades, for one thing.

But the market makes it impossible for any individual actor to do what is right -- the invisible hand is perverse. What we need is an association of educators empowered to impose common standards, including limits on transfers and "merit" scholarships, and to take other actions to reduce the devastating effects of zero-sum competition for top standing in a simplistic ranking system.

Unfortunately, fixing the law schools' rankings-induced race to the bottom probably would be illegal under current interpretations of the anti-trust laws. Current anti-trust law permits huge corporations to grow so large that they can buy politicians and public opinion, thus threatening the legal foundations of markets where they are most likely to succeed. At the same time, it bars the professions from using collective action to displace markets precisely where market forces are perverse. This is backwards. We need to break up any corporation big enough to lobby effectively for regulatory subsidy of private profit -- and re-organize the professions as self-governing bodies dedicated to public service.

And we need to make price discrimination illegal in the Universities, just as we did more than a century ago for the railroads.

If Ranking Rebates were illegal, many schools could immediately cut their tuition by a quarter or a third. Admissions officers could focus on the qualities that actually predict success in the law, instead of the ones that are easily measured in numerical rankings. Law students would be better able to focus on education, group learning and building relationships with their peers and professors, instead of competitive grade grubbing to keep their grant or transfer to a higher ranked school. And scholarship money could go to those who would best make use of it, instead of those who make schools look better on USNWR's arbitrary rankings.

[The author's much shorter letter on the same topic appeared in the New York Times May 7, 2010.]