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Earnings Inequality and Coordination Costs: Evidence from US Law Firms

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  • Luis Garicano
  • Thomas N Hubbard

Abstract

Using evidence from confidential Census data on US law offices, we study the extent to decreases in coordination costs are responsible increases in earnings inequality among lawyers. We show that inequality increased substantially between 1977 and 1992, and that partner-associate ratios changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a “hierarchical production function” and estimate its parameters in each period. We find that coordination costs fell over time, so that hiring one’s first associate leveraged a partner’s skill by about 30% more in 1992 than 1977. We find also that changes in lawyers’ hierarchical organization account for about two-third of the increase in earnings inequality among lawyers in the upper tail, but much less of the increase between lawyers in the upper tail and other lawyers. New organizational efficiencies potentially explain increases in inequality among lawyers, especially among the highest earners.

Suggested Citation

  • Luis Garicano & Thomas N Hubbard, 2018. "Earnings Inequality and Coordination Costs: Evidence from US Law Firms," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 34(2), pages 196-229.
    • Handle: RePEc:oup:jleorg:v:34:y:2018:i:2:p:196-229.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewy005
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    Cited by:

    1. Bertrand Candelon & Arnaud Dupuy, 2015. "Hierarchical Organization And Performance Inequality: Evidence From Professional Cycling," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1207-1236, November.
    2. Kuhn, Moritz & Luo, Jinfeng & Manovskii, Iourii & Qiu, Xincheng, 2023. "Coordinated firm-level work processes and macroeconomic resilience," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 107-127.
    3. Garicano, Luis, 2010. "Policemen, managers, lawyers: New results on complementarities between organization and information and communication technology," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 355-358, July.
    4. Adel Ben Youssef & Coetzee Bester & Aduba Chuka & Mounir Dahmani & Beverley Malan, 2014. "Building e-skills in Africa," Post-Print hal-03737364, HAL.
      • Ben Youssef, Adel & Bester, Coetzee & Chuka, Aduba & Dahmani, Mounir & Malan, Beverley, 2014. "Building e-skills in Africa," MPRA Paper 112240, University Library of Munich, Germany, revised 2014.
    5. Enzo Dia & Jacques Melitz, 2024. "The impact of common law on the volume of legal services: An international study," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(1), pages 265-297, January.
    6. repec:ipg:wpaper:2014-044 is not listed on IDEAS

    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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