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The Return to Knowledge Hierarchies

Luis Garicano () and Thomas N. Hubbard

No 12815, NBER Working Papers from National Bureau of Economic Research, Inc

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. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production 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, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

JEL-codes: D24 J24 J31 J44 L23 L84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ipr, nep-pr~ and nep-knm
Date: 2007-01
Note: IO LS
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Published as Luis Garicano & Thomas N. Hubbard, 2016. "The Returns to Knowledge Hierarchies," Journal of Law, Economics and Organization, Oxford University Press, vol. 32(4), pages 653-684.

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Journal Article: The Returns to Knowledge Hierarchies (2016) Downloads
Working Paper: The Return to Knowledge Hierarchies (2007) Downloads
Working Paper: The Return to Knowledge Hierarchies (2007) Downloads
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