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The Returns to Knowledge Hierarchies

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  • Luis Garicano
  • Thomas N. Hubbard

Abstract

Hierarchies allow individuals to leverage their knowledge through others’ time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. This article analyzes the earnings and organization of US lawyers and uses an equilibrium model of knowledge hierarchies inspired by Garicano and Rossi-Hansberg (2006. “Organization and Inequality in a Knowledge Economy,” 121 Quarterly Journal of Economics 1383–436) to assess how much lawyers’ productivity and the distribution of earnings across lawyers reflects lawyers’ ability to organize problem-solving hierarchically. Our estimates imply that hierarchical production leads to at least a 30% increase in productivity in this industry, relative to a situation where lawyers within the same office do not “vertically specialize.” We further find that it amplifies earnings inequality, mostly by increasing the earnings of the very highest percentile lawyers in business and litigation-related segments.

Suggested Citation

  • Luis Garicano & Thomas N. Hubbard, 2016. "The Returns to Knowledge Hierarchies," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(4), pages 653-684.
    • Handle: RePEc:oup:jleorg:v:32:y:2016:i:4:p:653-684.
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    File URL: http://hdl.handle.net/10.1093/jleo/eww008
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    Cited by:

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    2. Smeets, Valerie & Warzynski, Frederic, 2008. "Too many theories, too few facts? What the data tell us about the link between span of control, compensation and career dynamics," Labour Economics, Elsevier, vol. 15(4), pages 687-703, August.
    3. Wouter DESSEIN & Desmond (Ho-Fu) LO & SHANGGUAN Ruo & OWAN Hideo, 2024. "The Management of Knowledge Work," Discussion papers 24044, Research Institute of Economy, Trade and Industry (RIETI).
    4. Simon Schopohl, 2017. "Information Transmission in Hierarchies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01491930, HAL.
    5. Maria Guadalupe & Julie M. Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," Harvard Business School Working Papers 09-067, Harvard Business School.
    6. Guadalupe, Maria & Wulf, Julie, 2009. "The Flattening Firm and Product Market Competition," CEPR Discussion Papers 7253, C.E.P.R. Discussion Papers.
    7. Roberto Antonietti & Maria Rosaria Ferrante & Riccardo Leoncini, 2016. "Local market size, social capital and outsourcing: evidence from Emilia Romagna," Small Business Economics, Springer, vol. 47(1), pages 243-260, June.
    8. Ann P. Bartel & Ciaran S. Phibbs & Nancy Beaulieu & Patricia Stone, 2011. "Human Capital and Organizational Performance: Evidence from the Healthcare Sector," NBER Working Papers 17474, National Bureau of Economic Research, Inc.
    9. Alessandro Sforza, 2020. "Shocks and the Organization of the Firm: Who Pays the Bill?," CESifo Working Paper Series 8084, CESifo.
    10. 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.
    11. Lucas van der Velde, 2020. "Within Occupation Wage Dispersion and the Task Content of Jobs," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(5), pages 1161-1197, October.
    12. Simon Schopohl, 2017. "Information Transmission in Hierarchies," Post-Print halshs-01491930, HAL.
    13. Frank Limehouse & Robert McCormick, 2011. "Impacts of Central Business District Location: A Hedonic Analysis of Legal Service Establishments," Working Papers 11-21, Center for Economic Studies, U.S. Census Bureau.
    14. Hyytinen, Ari, 2021. "Shared problem solving and design thinking in entrepreneurship research," Journal of Business Venturing Insights, Elsevier, vol. 16(C).
    15. Steven N. Kaplan & Joshua Rauh, 2010. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," NBER Chapters, in: Corporate Governance, National Bureau of Economic Research, Inc.
    16. Schopohl, Simon, 2017. "Information transmission in hierarchies," Center for Mathematical Economics Working Papers 570, Center for Mathematical Economics, Bielefeld University.
    17. Kaplan, Steven N. & Rauh, Joshua, 2009. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," Working Papers 229, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    18. Carlo Altomonte & Armando Rungi, 2013. "Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance," Working Papers 2013.33, Fondazione Eni Enrico Mattei.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • 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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