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Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital

65 Pages Posted: 21 Jun 2005  

Luis Garicano

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)

Date Written: February 2005

Abstract

This paper examines hierarchies' role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market. When the extent of the market increases, individuals' knowledge becomes narrower, but deeper. Managerial leverage, the number of workers per manager, optimally increases to exploit this depth. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases 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 a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

Keywords: Organization, specialization, hierarchy, industry structure, division of labor

JEL Classification: D21, J24, J44, L11, L23, L84

Suggested Citation

Garicano, Luis and Hubbard, Thomas N., Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital (February 2005). CEPR Discussion Paper No. 4924. Available at SSRN: https://ssrn.com/abstract=747425

Luis Garicano (Contact Author)

University of Chicago - Booth School of Business - Economics ( email )

Graduate School of Business
1101 East 58th Street
Chicago, IL 60637
United States
773-834-2862 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Thomas N. Hubbard

Northwestern University - Department of Management & Strategy ( email )

Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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