Managerial leverage is limited by the extent of the market: Hierarchies, specialization, and the utilization of lawyers' human capital

Luis Garicano*, Thomas N. Hubbard

*Corresponding author for this work

Research output: Contribution to journalReview article

38 Scopus citations

Abstract

This paper examines the role of hierarchies in the organization of human-capitalintensive production. We develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices. The equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization, which increases as the extent of the market increases, As individuals' knowledge becomes narrower but deeper, managerial leverage - the number of workers per manager - optimally increases to exploit this depth. Consistent with our model, the share of lawyers who work in hierarchies and the ratio of associates to partners increase as market size increases and lawyers field specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand, or firm-size effects, and lend additional support to the view that, in legal services, hierarchies help exploit increasing returns associated with the utilization of human capital.

Original languageEnglish (US)
Pages (from-to)1-43
Number of pages43
JournalJournal of Law and Economics
Volume50
Issue number1
DOIs
StatePublished - Feb 2007

ASJC Scopus subject areas

  • Economics and Econometrics
  • Law

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