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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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Author Info
Garicano, Luis
Hubbard, Thomas

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Abstract

This paper examines hierarchies’ role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market. When the extent of the market increases, individuals’ knowledge becomes narrower, but deeper. Managerial leverage, the number of workers per manager, optimally increases to exploit this depth. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases 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 a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4924.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4924

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Related research
Keywords: division of labour; hierarchy; industry structure; organization; specialization;

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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References listed on IDEAS
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.:
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  4. Qian, Yingyi, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 527-44, July. [Downloadable!] (restricted)
  5. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May. [Downloadable!] (restricted)
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  6. Roy Radner & Timothy Van Zandt, 1992. "Information Processing in Firms and Returns to Scale," Annales d'Economie et de Statistique, ADRES, issue 25-26, pages 15, Janvier-J. [Downloadable!]
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Cited by:
(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. Luis Garicano & Thomas Hubbard, 2009. "Earnings Inequality and Coordination Costs: Evidence From U.S. Law Firms," NBER Working Papers 14741, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Fredrik Andersson & Matthew Freedman & John C. Haltiwanger & Julia Lane & Kathryn L. Shaw, 2006. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," NBER Working Papers 12435, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Andrew Epstein & Jonathan D. Ketcham & Sean Nicholson, 2008. "Professional Partnerships and Matching in Obstetrics," NBER Working Papers 14070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. James B. Rebitzer & Lowell J. Taylor, 2006. "When Knowledge Is an Asset: Explaining the Organizational Structure of Large Law Firms," IZA Discussion Papers 2353, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Hoyt Bleakley & Jeffrey Lin, 2007. "Thick-market effects and churning in the labor market: evidence from U.S. cities," Working Papers 07-23, Federal Reserve Bank of Philadelphia. [Downloadable!]
  6. Rosario Crino, 2006. "Are U.S. White-Collar Really at Risk of Service Offshoring?," CESPRI Working Papers 183, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Oct 2006. [Downloadable!]
  7. Nick Bloom & Raffaella Sadun & John Van Reenen, 2009. "The Organization of Firms Across Countries," CEP Discussion Papers dp0937, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  8. Rob Simmons & D Berri, 2007. "Does it pay to specialize? The story from the Gridiron," Working Papers 005290, Lancaster University Management School, Economics Department. [Downloadable!]
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