The Return to Knowledge Hierarchies
University of Chicago - Booth School of Business - Economics; Centre for Economic Policy Research (CEPR)
Thomas N. Hubbard
Northwestern University - Department of Management & Strategy; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 6077
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.
Number of Pages in PDF File: 67
Keywords: Hedonics, hierarchy, matching, scale of operations effects, sorting, Structural Estimation
JEL Classification: D31, J31, J41, L22, L23, L84
Date posted: June 29, 2007
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