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The Return to Knowledge Hierarchies

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Author Info
Thomas Hubbard
Luis Garicano

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Abstract

Hierarchies allow individuals to leverage their knowledge through others. time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers, productivity and the distribution of earnings across lawyers reflects lawyers. ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production in this industry, relative to a situation where lawyers within the same office do not vertically specialize. We further find that it amplifies earnings inequality, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-01.

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Length: 65 pages
Date of creation: Jan 2007
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Handle: RePEc:cen:wpaper:07-01

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven N. Kaplan & Joshua Rauh, 2007. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," NBER Working Papers 13270, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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