The segmented market in legal education:

We found very strong evidence that there is a difference between the top tier of law schools and the rest of the market. This may seem obvious (of course Harvard is different from a 4th tier school) but it is important nonetheless.

Our basic regression model predicted change in median LSAT as a function of the law school’s starting position (i.e. its quartile ranking in 1992), whether it was a public law school or not, average student loan debt, the change in Am Law 200 jobs in the metropolitan statistical area, and some strategic behavior variables (change in 1L class size, change in % of 1L class in part time program), and changes in academic and lawyer/judge reputation ranks. (We also tried some other variables, the full details are in the paper.)

When we ran the regressions separately for the top quartile (the top quartile is roughly “Tier 1” in current U.S. News terminology – the paper explains in more detail about why we used quartiles rather than tiers) and quartiles 2-4, we found that the coefficients were quite different for the two groups. Here’s one set of our results so you can see this:

My apologies for the ugly table – I haven’t quite mastered the powerblogs table function. See Regression Model 2 in the paper for a clearer version (you can download the paper here.)

* indicates significance at the 5% level, ** at the 1% level. Standard errors are in ().

Take a close look at average student loan debt. We used this as a proxy for the real cost of a legal education, although it is far from perfect for these purposes. One problem is that this is not a change variable (we just had data for 2004 graduates), while most of our other variables (including our dependent variable) were change variables. We wish we had had better data, but sometimes in empirical work you have to use what you have. The interesting result here is that the sign changes. Larger average student debt meant a larger (more positive) change in median LSAT for schools in the top quartile but had the opposite impact for schools in quartiles 2-4.

We don’t think schools in the top quartile can move up just by raising their tuition. There are some excellent schools in the top quartile that don’t charge an arm and a leg (although tuition everywhere seems to be higher than the $4/credit hour I remember paying to attend the University of Texas in the 1980s.) What we do think is happening here is that the top quartile schools are selling something that students think is worth paying top dollar for, and as a result, the schools are able to charge for it. This also doesn’t mean that quartile 2-4 schools are cheap. But prospective students are engaging in some shopping among the schools where they receive offers – if it means moving up into a top quartile school (or up within the top quartile), they will pay more. But among the quartile 2-4 schools, students are more price sensitive.

As I’ll discuss later in the week, Bill and I think that one of the main things the top schools are selling is access to their on-campus interview programs that include many more top legal employers (= large firms) than lower ranked schools.

This relative price insensitivity among the top quartile schools gives them several advantages over the rest of the schools. First, it means the top schools have more money. Money matters – it buys lots of things that makes a school desirable, from top faculty to library books to improved facilities. It means the top schools have more money to buy students with high LSATs. Most importantly, it means that there are two quite different markets for law schools (or law students). Different strategies are needed to survive/rise in the top quartile than in the rest of the pack; different considerations are at work for students in choosing among schools in the two segments. More on this later in the week.