When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms
James B. Rebitzer
Boston University School of Management; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); Bard College - The Levy Economics Institute
Lowell J. Taylor
Carnegie Mellon University - H. John Heinz III School of Public Policy and Management
Levy Economics Institute Working Paper No. 477
We study the economics of employment relationships through theoretical and empirical analyses of an unusual set of firms, large law firms. Our point of departure is the property rights approach that emphasizes the centrality of ownership's legal rights to control important, nonhuman assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study, because the most valuable assets of these firms take the form of knowledge - particularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large 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. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees.
Number of Pages in PDF File: 38
Keywords: Law firms, property rights, human capital
JEL Classification: J4, L2, M5
Date posted: November 1, 2006
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