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When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms

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  • James B. Rebitzer
  • Lowell J. Taylor

Abstract

We study the economics of employment relationships through theoretical and empirical analyses of an unusual set of firms, large law firms. Our point of departure is the "property rights" approach that emphasizes the centrality of ownership's legal rights to control important, nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study, because the most valuable assets of these firms take the form of knowledge--particularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large law firms, the use of "up or out" promotion contests and the practice of having winners become residual claimants in the firm, emerge naturally in this setting. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_477.

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Date of creation: Oct 2006
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Handle: RePEc:lev:wrkpap:wp_477

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  1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December.
  2. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 486-507, June.
  3. Christopher Ferrall, 1991. "Promotion & Incentives in Partnerships: Theory & Evidence," Working Papers 808, Queen's University, Department of Economics.
  4. Garicano, Luis & Hubbard, Thomas, 2005. "Managerial Leverage is Limited By the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital," CEPR Discussion Papers 4924, C.E.P.R. Discussion Papers.
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  7. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  8. Garicano, Luis & Hubbard, Thomas N., 2005. "Hierarchical sorting and learning costs: Theory and evidence from the law," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 349-369, October.
  9. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
  10. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-48, June.
  11. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  12. Farrell, Joseph & Scotchmer, Suzanne, 1988. "Partnerships," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 279-97, May.
  13. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 841-64, October.
  14. Steven Tadelis & Jonathan Levin, 2004. "Profit Sharing and the Role of Professional Partnerships," 2004 Meeting Papers 156, Society for Economic Dynamics.
  15. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(3), pages 805-851, August.
  16. O'Flaherty, B. & Siow, A., 1989. "On The Job Screening, Up Or Out Rules, And Firm Growth," Discussion Papers, Columbia University, Department of Economics 1989_02, Columbia University, Department of Economics.
  17. Michael Waldman, 1989. "Up-or-Out Contracts: A Signaling Perspective," UCLA Economics Working Papers 556, UCLA Department of Economics.
  18. Rebitzer, James B & Taylor, Lowell J, 1995. "Efficiency Wages and Employment Rents: The Employer-Size Wage Effect in the Job Market for Lawyers," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 13(4), pages 678-708, October.
  19. Prendergast, Canice, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 523-34, May.
  20. Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 6(4), pages 423-44, October.
  21. Kevin Lang & Peter-John Gordon, 1995. "Partnerships as Insurance Devices: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 614-629, Winter.
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Cited by:
  1. Kvaløy, Ola & Olsen, Trond E., 2007. "Relative Performance Evaluation, Agent Hold-Up and Firm Organization," Discussion Papers 2007/26, Department of Business and Management Science, Norwegian School of Economics.
  2. Cathrine Filstad & Petter Gottschalk, 2009. "How Knowledge Organizations Work: The Case of Real Estate Agencies," International Real Estate Review, Asian Real Estate Society, vol. 12(1), pages 88-97.
  3. Bardsley, Peter & Erkal, Nisvan & Nikiforakis, Nikos & Wilkening, Tom, 2013. "Recursive contracts, firm longevity, and rat races: An experimental analysis," European Economic Review, Elsevier, vol. 61(C), pages 217-231.
  4. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
  5. Ann Bartel & Brianna Cardiff-Hicks & Kathryn Shaw, 2013. "Compensation Matters: Incentives for Multitasking in a Law Firm," NBER Working Papers 19412, National Bureau of Economic Research, Inc.
  6. Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2006. "Corporate Governance and the Plight of Minority Shareholders in the United States before the Great Depression," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 125-152 National Bureau of Economic Research, Inc.
  7. Nuno Garoupa & Fernando Gómez, 2002. "Cashing by the hour: Why large law firms prefer hourly fees over contingent fees," Economics Working Papers 639, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Maija Halonen, 2002. "Organizational Design, Technology and the Boundaries of the Firm," Bristol Economics Discussion Papers 02/540, Department of Economics, University of Bristol, UK.
  9. Lehmann, Jee-Yeon, 2011. "Job assignment and promotion under statistical discrimination: evidence from the early careers of lawyers," MPRA Paper 33466, University Library of Munich, Germany.
  10. Naomi Lamoreaux & Jean-Laurent Rosenthal, 2004. "Corporate Governance and the Plight of Minority Shareholders in the United States Before the Great Depression," NBER Working Papers 10900, National Bureau of Economic Research, Inc.
  11. Paul Oyer & Scott Schaefer, 2012. "Firm/Employee Matching: An Industry Study of American Lawyers," NBER Working Papers 18620, National Bureau of Economic Research, Inc.

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