Organization and Inequality in a Knowledge Economy

45 Pages Posted: 2 Aug 2005 Last revised: 27 Feb 2015

See all articles by Luis Garicano

Luis Garicano

IE Business School; Centre for Economic Policy Research (CEPR)

Esteban Rossi-Hansberg

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2005


We present a theory of the organization of work in an economy where knowledge is an essential input in production: a knowledge economy. In this economy a continuum of agents with heterogeneous skills must choose how much knowledge to acquire and may produce on their own or in organizations. Our theory generates an assignment of workers to positions, a wage structure, and a continuum of knowledge-based hierarchies. Organization allows low skill agents to ask others for directions. Thus, they acquire less knowledge than in isolation. In contrast, organization allows high skill agents to leverage their knowledge through large teams. Hence, they acquire more knowledge than on their own. As a result, organization decreases wage inequality within workers, but increases income inequality among the highest skill agents. We also show that equilibrium assignments and earnings can be interpreted as the outcome of alternative market institutions such as firms, or consulting and referral markets. We use our theory to study the impact of information and communication technology, and contrast its predictions with US evidence.

Suggested Citation

Garicano, Luis and Rossi-Hansberg, Esteban Alejandro, Organization and Inequality in a Knowledge Economy (July 2005). NBER Working Paper No. w11458. Available at SSRN:

Luis Garicano

IE Business School ( email )

Calle MarĂ­a de Molina, 11
Madrid, 28006

Centre for Economic Policy Research (CEPR)

United Kingdom

Esteban Alejandro Rossi-Hansberg (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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