You are a management consultant for a 30-year old partner in a large law firm. In a meeting, your client says: “According to an article in the New York Times, 57 percent of large law firms have a mandatory retirement age for partners in the firm. Before they retire, partners are paid directly for the work that they do, and, as an owner, they are entitled to a share of the profits of the firm. Once they retire, partners do not receive either form of compensation. In light of this, I think we should eliminate mandatory retirement in order to gain a ‘competitive advantage’ in attracting high-quality lawyers to work for our firm. Of course, you are the expert.” What should you recommend?
1. Do not implement this plan; it will result in incentive compatibility problems.
2. Implement this plan; it will attract high-quality workers, especially those nearing retirement.
3. Do not implement this plan; it will generate high transaction costs.
4. Implement this plan; it will greatly lower transaction costs.