Managerial Leverage is Limited By the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital
AbstractThis 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4924.
Date of creation: Feb 2005
Date of revision:
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Other versions of this item:
- Garicano, Luis & Hubbard, Thomas N, 2007. "Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers' Human Capital," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 1-43, February.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
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