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Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers' Human Capital

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  • Garicano, Luis
  • Hubbard, Thomas N

Abstract

This paper examines the role of hierarchies in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices. The equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization, which increases as the extent of the market increases. As individuals' knowledge becomes narrower but deeper, managerial leverage--the number of workers per manager--optimally increases to exploit this depth. Consistent with our model, the share of lawyers who work in hierarchies and the ratio of associates to partners increase as market size increases and lawyers field specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand, or firm-size effects, and lend additional support to the view that, in legal services, hierarchies help exploit increasing returns associated with the utilization of human capital.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 50 (2007)
Issue (Month): 1 (February)
Pages: 1-43

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Handle: RePEc:ucp:jlawec:y:2007:v:50:i:1:p:1-43

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  1. Van Zandt, Timothy, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 633-58, July.
  2. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
  3. Raghuram G. Rajan & Luigi Zingales, . "Power in a Theory of the Firm," CRSP working papers 335, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  5. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-46, September.
  6. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  7. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 527-44, July.
  8. Roy RADNER & Timothy VAN ZANDT, 1992. "Information Processing in Firms and Returns to Scale," Annales d'Economie et de Statistique, ENSAE, issue 25-26, pages 265-298.
  9. Rebitzer, James B, 1993. "Radical Political Economy and the Economics of Labor Markets," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1394-434, September.
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