UP-OR-OUT RULES IN THE MARKET FOR LAWYERS

We examine how up-or-out rules operate as a screening device in the ma rket for lawyers. Using data on large New York law firms, we show that firm growth is a slow and uncertain process because performance as an associate is not an especially informative signal about whether a law yer will make a good partner and because the costs of mistaken promoti on are relatively high. A newly hired associate is unlikely to be a su itable partner and the screening process is relatively imprecise. Firm growth therefore contributes between 5%-7% of the present value of pr ofits of a law firm.