« Assorted links | Main | All you can eat? »
Liability Law and Firm Size
I would like to tile my front porch steps and have been shopping. Lowe's and Home Depot have plenty of tile but although they advertise installation they won't install it outdoors. The salespeople, however, will surreptitiously recommend small family contractors. Call Jose, they tell me handing me a number. Why won't the big firms install outdoor tile?
As best as I can figure the answer is liability. A few slips, falls and an enterprising lawyer or two and Lowe's could be out millions of dollars. The revenues aren't worth the risk so small firms step into the breach. The key, of course, is that the small firms won't be sued because they are judgment proof.
Roberta Romano was here yesterday and offered another example. The big auditing firms won't do SOX audits for small firms because the revenues are low relative to the risks. The smaller firms must turn to judgment proof auditors of less reliable reputation.
In one sense, this is a good workaround for a liability system that seeks out deep pockets. Consumers are better off than they would be if neither Lowe's nor the judgment proof firms offered services and they are also better off than if Lowe's was required to offer services, because the price at which Lowe's would do so voluntarily would be prohibitive (consumers would be forced to buy insurance they didn't want at the price).
But more deeply the resulting system is inefficient. Consumers don't get the insurance that the liability law is supposed to provide and they must turn to lower quality, higher cost service providers even when they would prefer larger firms with solid reputations.
Posted by Alex Tabarrok on March 20, 2008 at 07:28 AM in Law | Permalink
Comments
"The smaller firms must turn to judgment proof auditors of less reliable reputation."
Among those of us who know, the smaller firms have better reputations.
The primary advantage of the "Big 4" is the "Big," not the quality of the work.
And why the assumption that smaller firms are judgment proof? Evidence?
Posted by: save_the_rustbelt at Mar 20, 2008 7:36:10 AM
"The smaller firms must turn to judgment proof auditors of less reliable reputation."
Among those of us who know, the smaller firms have better reputations.
The primary advantage of the "Big 4" is the "Big," not the quality of the work.
And why the assumption that smaller firms are judgment proof? Evidence?
Posted by: save_the_rustbelt at Mar 20, 2008 7:36:47 AM
I, too, am puzzled by your assumption that smaller service providers are "lower quality, higher cost". No room in your world for the artisan? Personally, the service I've been provided by the big box stores has been much, much worse than that provided by independent professionals. The former works on volume, so they don't have to care if they do a shoddy job. The latter work solely on reputation and word of mouth - right down to your example of big box store employees referring you to them.
You make a bold inference completely unbacked by facts.
Posted by: Jim at Mar 20, 2008 8:02:47 AM
Roberta Romano was hear yesterday and offered another example. The big auditing firms won't do SOX audits for small firms because the revenues are low relative to the risks. The smaller firms must turn to judgment proof auditors of less reliable reputation.
I absolutely agree with Rustbelt. Anybody that's been at a "big 4" knows that they derive
reputation from size, not quality of work. I don't know who Ms. Romano is, but I'm pretty
sure she has understanding of auditing-big firms are chosen because they can pay in
shareholder/creditor lawsuits.
Posted by: Superheater at Mar 20, 2008 8:14:33 AM
The Big Four are essentially an oligopoly when it comes to the audit market. They get the work because of the "Nobody ever got fired working for IBM mentality". That's not to say professionals there are worse than anywhere else, but the incentives of the partners are skewed towards getting audits done as quickly as possible.
Posted by: Ali Choudhury at Mar 20, 2008 8:31:53 AM
Slip-and-fall liability is probably just one of several factors affecting the profitability of outdoor tile installation. The profit risk caused by being subject to extremes of temperature and moisture, the risk of more and larger warranty claims, difficulty in finding installers capable of efficiently assessing and compensating for irregular surfaces and substrates, etc., would be a part of my equation if I were trying to figure out whether I could make money installing outdoor tile.
Posted by: Harry at Mar 20, 2008 8:57:15 AM
Whatever you think of independent contractors or the big four the key is that to escape liability firms and consumers are making choices that they otherwise would not - thus the goal of liability law isn't being met and consumers aren't getting what they want, hence inefficiency and deadweight loss.
Posted by: Alex Tabarrok at Mar 20, 2008 9:10:37 AM
Actually, your assumption about small contractors is mistaken since they are typically the ones that perform the installation for Home Depot and Lowes. From my experience (this may be regional, of course), and having known a contractor that has tried desperately to get on their contractor lists, HD and Lowe's farm out the work to these smaller contractors, who then perform the installation under the auspices of the contracting establishment. Presumably, the liability policy of the principal applies to the agent, hence the liability concerns. Don't, however, be misled by assumption that the "smaller contractors" do shoddier work; you're essentially being fooled by a brand.
Posted by: Marshall at Mar 20, 2008 9:48:04 AM
Whatever you think of independent contractors or the big four the key is that to escape liability firms and consumers are making choices that they otherwise would not - thus the goal of liability law isn't being met and consumers aren't getting what they want, hence inefficiency and deadweight loss.
Maybe. Sometimes. Or maybe consumers are just willing to self-insure, in effect, by paying a lower price. But you are certainly retreating from your claim about tile installation.
Is it possible that installing outside requires more skill than installing inside? There's weather to worry about, and you may have less control over the surface you're instaling on. Then it might simply be unprofitable for Lowe's to have employees around who can do that from time to time.
And of course there's potential liability for inside work as well - not just floors but electrical and plumbing work. Do HD and Lowe's do that?
Posted by: Bernard Yomtov at Mar 20, 2008 9:48:33 AM
Did you get any evidence from people who know how Home Depot operates that that's the case? The big DIY stores in the UK don't offer installation services either. I think liability's less of an issue than installation being a non-core service for which the margins aren't very enticing.
Posted by: Ali Choudhury at Mar 20, 2008 10:10:01 AM
Wow, none of you believe that potential liability is significantly greater for large corporations
relative to independents? Or that this has implications for inefficiency?
There are quite a few strongly-held prejudices to overcome before these inefficiencies can be removed.
If only we could see the unseen growth that would happen if this problem with the legal system were removed...
Posted by: Person at Mar 20, 2008 10:11:00 AM
I think Alex's point is dead on. Petty, non-empirical conversation about the quality of independent craftsman is not relevant. You are not rebutting Alex's original claim by trying to argue that the little guys are actually better than the corporate chains. That point is irrelevant.
What is significant is that large firms are avoiding offering goods and services to customers where the potential liability is high. This void is being filled by smaller firms who, in a normal market context, may or may not be chosen by the consumer. That is all that matters. The inefficiency results because firms are surviving in this regulatory context who would of been weeded out with ease under normal market conditions.
Posted by: john pertz at Mar 20, 2008 10:32:38 AM
I think Alex's point is dead on. Petty, non-empirical conversation about the quality of independent craftsman is not relevant. You are not rebutting Alex's original claim by trying to argue that the little guys are actually better than the corporate chains. That point is irrelevant.
What is significant is that large firms are avoiding offering goods and services to customers where the potential liability is high. This void is being filled by smaller firms who, in a normal market context, may or may not be chosen by the consumer. That is all that matters. The inefficiency results because firms are surviving in this regulatory context who would of been weeded out with ease under normal market conditions.
Posted by: john pertz at Mar 20, 2008 10:34:59 AM
"Call Jose, they tell me handing me a number. Why won't the big firms install outdoor tile?"
Because nobody, other than Jose, wants to do manual labor in this country.
HC.
Posted by: Happy Camper at Mar 20, 2008 11:06:41 AM
...
The big DIY stores in the UK don't offer installation services either. I think liability's less of an issue than installation being a non-core service for which the margins aren't very enticing.
...
And of course there's potential liability for inside work as well - not just floors but electrical and plumbing work. Do HD and Lowe's do that?
The big chain hardware stores indeed do all kinds of installation, as Alex mentioned:
Lowe's and Home Depot have plenty of tile but although they advertise installation they won't install it outdoors.
Check out Lowe's website:
http://www.lowes.com/lowes/lkn?action=topicSelect&topic=weInstall
They will install countertops, appliances, carpet, ceiling fans, doors, decking, roofing, fencing, etc. Actually, now that I look at that website, the fact they won't install outdoor tile seems kind of odd.
Posted by: Bob Montgomery at Mar 20, 2008 11:50:56 AM
It may also be related to product guarantees. Outdoor tile, arguably, takes a much greater beating than indoor tile (and, depending on type, it is delictate), and work performed by big box home improvement stores probably carries a more comprehensive guarantee than that of independent contractors. It may be hard, for insurance purposes, to differentiate between damage caused by environmental conditions and workmanship errors.
Posted by: Marshall at Mar 20, 2008 12:16:21 PM
Alex,
Don't do it. You'll end up with a slippery mess. While your small-firm contractor may be judgement proof you are not, which you'll discover the first time a guest or mail carrier slips and falls. I suspect you are right that the big-box outfits are avoiding liability, but with good reason.
I certainly agree that the current liability system is inefficient, but I fail to see how this case is illustrative.
Posted by: Brad at Mar 20, 2008 12:26:45 PM
Alex, here's your list of tile installers: http://www.mybbb.org/commonrosterByTob.html?ID=10159 . Ignore the PA listings and you've still got a good number to choose from.
Posted by: DCBBB at Mar 20, 2008 12:29:15 PM
If there just happens to be one tiny aspect of the american economy that favors small mom and pop businesses, then I'm quite happy about that.
Posted by: bruce at Mar 20, 2008 12:57:12 PM
As a lawyer (albeit tax, not personal injury) who enjoys this blog on my lunch hour, I'd just like to point out that when figuring out who to sue after a slip and fall, a good attorney would not just name the installer of the tile, but also the company that sold the tile (and perhaps recommended its suitability for the purpose for which it was to be used), the company that manufactured the tile, the person who was supposed to keep the tile clean, the owner of the property on which the tile was installed - anyone with any connection and the requisite pockets (deep or otherwise). In other words, Home Depot will still be in the liability chain with respect to the tile. Also, when you take into account other high-risk products they may sell (nail guns, saws, propone tanks, space heaters) or install (bathroom tile?), would the risk associated with installing outdoor tile be so much higher than that associated with the other items that it would keep them out of the market?
Posted by: lawyer at Mar 20, 2008 1:07:27 PM
Hey, Alex, when can we get more from you on how access to credit should be unregulated?
Posted by: Dave at Mar 20, 2008 1:38:35 PM
Anyone that cares to investigate knows that HD and Lowe's (as one poster alluded to above) farm out ALL of their "installation services" to the lowest bidding independent contractors and then take a cut off the top. And many people will attest to the fact that going through one of the superstores does not in any way guarantee a superior level of quality. In fact, it makes sense that the contractor is more likely to cut corners in order to maximize his profit, and to compensate for the cut that is going to the superstore. Regardless, the work is always being done by the "small guy", so you can't draw conclusions about small contractor quality vs. big contractor quality here. To my knowledge, the superstores don't have any sort of rigorous qualification/standards that must be adhered to by their contractors, so I really doubt that there is any sort of quality control going on that would justify the added cost of going through a superstore as opposed to doing some legwork and getting reccommendations.
Also, I am fairly condfident that when the customer signs up for these services they sign some acknowledgement that HD/Lowe's are not the ones providing the services -- they're just the middleman and have no liability for workmanship problems done by the indepdendent contractors who are (likely) judgment proof.
Posted by: Allison at Mar 20, 2008 1:49:42 PM
Anyone that cares to investigate knows that HD and Lowe's (as one poster alluded to above) farm out ALL of their "installation services" to the lowest bidding independent contractors and then take a cut off the top. And many people will attest to the fact that going through one of the superstores does not in any way guarantee a superior level of quality. In fact, it makes sense that the contractor is more likely to cut corners in order to maximize his profit, and to compensate for the cut that is going to the superstore. Regardless, the work is always being done by the "small guy", so you can't draw conclusions about small contractor quality vs. big contractor quality here. To my knowledge, the superstores don't have any sort of rigorous qualification/standards that must be adhered to by their contractors, so I really doubt that there is any sort of quality control going on that would justify the added cost of going through a superstore as opposed to doing some legwork and getting reccommendations.
Also, I am fairly condfident that when the customer signs up for these services they sign some acknowledgement that HD/Lowe's are not the ones providing the services -- they're just the middleman and have no liability for workmanship problems done by the indepdendent contractors who are (likely) judgment proof.
Posted by: Allison at Mar 20, 2008 1:49:45 PM
Alex has just invented, out of whole cloth, the idea that Home Depot won't do outdoor tile installation for liability reasons.
The real reason: installing tile outdoors is a pain in the ass. If it rains/snows/sleets anytime up to a week after installation, it's ruined and you have to do it over. How many do-overs are budgeted for in the Home Depot installation price? Zero, that's how many. Plus you have to use frostproof porcelain impervious tiles, which Home Depot probably doesn't even sell. Most ceramic tiles canNOT be used outdoors.
Others have already shot down your silly liability argument which you made up with no evidence whatsoever.
Posted by: Anon at Mar 20, 2008 2:06:53 PM
"But more deeply the resulting system is inefficient. Consumers don't get the insurance that the liability law is supposed to provide ..."
From the point of efficiency, this is a good thing. This kind of "insurance" is insurance that few if any people would buy voluntarily. That's why "the liability law" calls for it--left to their own devices, buyers and sellers never agreed to this sort of thing. It's only judges who thought this sort of thing worthwhile. What buyer would want "insurance" that pays off only after years of litigation if at all, that "compensates" you for pain and suffering, and that gives a third of the recovery to your lawyer?
When liability for small-plane crashes drove the manufacturers out of the small-plane business back in the 1970s, the cost of the tort law's "insurance" was about $70,000 per plane. You could have bought a huge amount of real life insurance, which would cover you no matter what you died of or whether your plane was "defective," a lot cheaper than that.
Posted by: Alan Gunn at Mar 20, 2008 2:17:02 PM
