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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 in large law firms. Our point of departure is the “property-rights†approach that emphasizes the centrality of ownership’s legal rights to control significant nonhuman assets of the enterprise. From this perspective, law firms are an interesting object of study because the key asset in these firms is knowledge, particularly knowledge of the needs and interests of clients. We argue that two distinctive organizational features of 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.

Suggested Citation

  • James B. Rebitzer & Lowell J. Taylor, 2007. "When Knowledge Is an Asset: Explaining the Organizational Structure of Large Law Firms," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 201-229.
  • Handle: RePEc:ucp:jlabec:v:25:y:2007:p:201-229
    DOI: 10.1086/510761
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    Cited by:

    1. 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.
    2. Lewis Evans & Graeme Guthrie & Neil Quigley, 2012. "Contemporary Microeconomic Foundations for the Structure and Management of the Public Sector," Treasury Working Paper Series 12/01, New Zealand Treasury.
    3. Barlevy, Gadi & Neal, Derek, 2016. "Allocating Effort and Talent in Professional Labor Markets," Working Paper Series WP-2016-3, Federal Reserve Bank of Chicago.
    4. 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.
    5. Heski Bar-Isaac, 2007. "Something to prove: reputation in teams," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 495-511, June.
    6. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up-or-out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325.
    7. Paul Oyer & Scott Schaefer, 2012. "Firm/Employee Matching: An Industry Study of American Lawyers," NBER Working Papers 18620, National Bureau of Economic Research, Inc.
    8. Kvaløy, Ola & Olsen, Trond E., 2008. "Relative performance evaluation, agent hold-up and firm organization," Journal of the Japanese and International Economies, Elsevier, vol. 22(2), pages 229-241, June.
    9. 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.
    10. Braz Camargo & Elena Pastorino, 2016. "Learning-by-Employing: The Value of Commitment under Uncertainty," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 581-620.
    11. 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.
    12. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
    13. 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.
    14. Radoslawa Nikolowa & Daniel Ferreira, 2018. "How to Sell Jobs," Working Papers 846, Queen Mary University of London, School of Economics and Finance.
    15. Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, University of Chicago Press, vol. 28(4), pages 893-922, October.
    16. Maija Halonen-Akatwijuka, 2010. "Organizational Design, Technology and the Boundaries of the Firm," Economica, London School of Economics and Political Science, vol. 77(307), pages 544-564, July.
    17. Alex Gershkov & Jianpei Li & Paul Schweinzer, 2009. "Efficient tournaments within teams," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 103-119.
    18. Picariello, Luca, 2017. "Organizational Design with Portable Skills," Discussion Paper Series in Economics 2/2017, Norwegian School of Economics, Department of Economics.
    19. 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.
    20. 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.

    More about this item

    JEL classification:

    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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