Earnings Inequality and Coordination Costs: Evidence From U.S. Law Firms

Luis Garicano and Thomas Hubbard

No 14741, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a "hierarchical production function" in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, 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 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.

JEL-codes: J31 J44 L22 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-lab
Note: IO LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Luis Garicano & Thomas N Hubbard, 2018. "Earnings Inequality and Coordination Costs: Evidence from US Law Firms," The Journal of Law, Economics, and Organization, vol 34(2), pages 196-229.

Downloads: (external link)
http://www.nber.org/papers/w14741.pdf (application/pdf)

Related works:
Journal Article: Earnings Inequality and Coordination Costs: Evidence from US Law Firms (2018)
Working Paper: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:14741

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14741

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).