Governments in the United States must offer free legal services to low-income people accused of crimes. To provide these services, many jurisdictions rely on assigned counsel systems, where private attorneys represent indigent defendants on a contract basis. These defendants are more likely to be convicted and incarcerated than defendants with privately retained attorneys. Using detailed court records, we investigate the mechanisms behind this disparity and consider their policy implications. We find that adverse selection among lawyers is not the primary contributor to the assigned counsel penalty. We conclude that reform efforts should address moral hazard in assigned counsel systems.