The Return to Knowledge Hierarchies

65 Pages Posted: 12 Jan 2007 Last revised: 9 Jul 2010

See all articles by Luis Garicano

Luis Garicano

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

Thomas N. Hubbard

Northwestern University - Department of Management & Strategy; National Bureau of Economic Research (NBER)

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Date Written: January 2007

Abstract

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 "vertically specialize." We further find that it amplifies earnings inequality, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

Suggested Citation

Garicano, Luis and Hubbard, Thomas N., The Return to Knowledge Hierarchies (January 2007). NBER Working Paper No. w12815. Available at SSRN: https://ssrn.com/abstract=956854

Luis Garicano

IE Business School ( email )

Calle MarĂ­a de Molina, 11
Madrid, 28006
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas N. Hubbard (Contact Author)

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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