Why the Upside Comes With Risk
The Italian bar-exam study finds a large return to access to legal practice, but an earnings gap does not explain itself. This chapter compares four possible mechanisms: restricted competition, harder or less flexible work, a portable signal attached to the license, and compensation for income risk. The aim is not to declare a universal winner for every regulated occupation. It is to see why, in this legal-practice case, the risk explanation fits the upper-tail and volatility evidence better than a simple story about monopoly rents.
What a rent story predicts
A monopoly rent is income above the competitive return that exists because entry is restricted and incumbents can charge more. In a licensing setting, the proposed chain is intuitive: the government requires a permit, the permit limits who can provide a service, fewer providers face less competition, prices or markups rise, and lawyers capture part of the resulting surplus. Under this explanation, the earnings premium is primarily a transfer created by the barrier rather than compensation for an unusual cost of doing the work.
A compensating differential has a different logic. A job can pay more because it comes with an unattractive feature—uncertain income, long hours, low flexibility, or some other burden. The additional pay is not necessarily a rent extracted from consumers. It is the amount needed, in expectation, to make people willing to choose that work over a safer or more comfortable alternative. The two mechanisms can coexist, but they make different predictions about who benefits, how competition matters, and what happens outside the occupation.
The paper first considers why monopoly rents might be plausible. The legal profession is protected by a government examination, and lawyers participate in grading commissions. An entry test can be used to hold down competition even when it is described as a quality screen. If that were the main explanation, however, the market should show some signs that additional lawyers erode the premium by reducing markups.
The study tests that prediction using total legal revenues across Italian commuting zones. The logic is not that each individual lawyer must earn less when there are more lawyers. More providers can divide a fixed demand among themselves, making individual revenue fall even without monopoly power. The relevant market-level prediction is that, if competition reduces markups while total demand is not itself created by the number of suppliers, total revenue should decline as lawyer density rises. If prices are already close to marginal cost, total revenue should be largely insensitive to density.
The authors use data from 611 commuting zones covering 2006 through 2019. They measure total lawyer revenue per person and the number of lawyers per person, while controlling for local economic conditions, employment, labor-force participation, year effects, zone effects, and—most importantly—zone-specific trends. The initial relationship can look positive, because a prosperous area may both attract more lawyers and generate more demand for legal services. Once local trends are included to absorb that demand-driven movement, the estimated effect of lawyer density on total revenue is essentially zero. A one-standard-deviation increase in density corresponds to only a 0.7 percent increase in total revenue relative to the mean.
That result weighs against the idea that the individual earnings premium is mainly sustained by markups protected by the bar exam. It does not prove that no lawyer ever earns a rent.