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

By Luis Garicano, T. N. Hubbard. Journal law and economy, 2007

121 citations recorded by the source corpus.

This paper examines the role of hierarchies in the organization of human‐capital‐intensive production. We develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices. The equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization, which increases as the extent of the market increases. As individuals’ knowledge becomes narrower but deeper, managerial leverage—the number of workers per manager—optimally increases to exploit this depth. Consistent with our model, the share of lawyers who work in hierarchies and the ratio of associates to partners increase 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, in legal services, hierarchies help exploit increasing returns associated with the utilization of human capital.

Subfields: Economics and Econometrics, Safety Research

View Paper: https://www.semanticscholar.org/paper/4bbb205f816892e52cd9ca91d95116efe523dd8c

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Citations in the corpus

Matching Firms, Managers, and Incentives (2015, unknown): “7 Other examples of recent worker-firm endogenous matching models include Garicano and Hubbard ð2007Þ, for law firms, and Besley and Ghatak ð2005Þ and Francois ð2007Þ, for the nonprofit sector.”
Personnel Economics: Hiring and Incentives (2010, background): “In Garicano and Hubbard (2007), they show that bigger markets allow lawyers to specialize more, to be more likely to work in a hierarchy, and to have more leveraged hierarchies.”
Theory and evidence in internal labor markets (2007, background): “…(1979,1985) and Shapiro and Stiglitz (1984), the idea of influence costs as found, for example, in Milgrom (1988) and Milgrom and Roberts (1988), and the idea of knowledge hierarchies as found, for example, in Garicano (2000), Garicano and Hubbard (2005), and Garicano and Rossi-Hansberg (2006).”
Specialization and Success: Evidence from Venture Capital (2009, background): “This would argue for examining these effects in accounting, consulting, financial service, or law firms (see, e.g., Berger et al., 2005, and Garicano and Hubbard, 2007, 2009.”
The Value of Bosses (2014, unknown): “14 The more comprehensive productivity equation contains lagged boss effects on current productivity, estimating equation (12).”
The Anatomy of French Production Hierarchies (2012, result): “These results support our finding that delayering is associated with systematic occupational shifts.6 Garicano and Hubbard ð2007Þ study the role of hierarchies as a means of organizing production in law firms.”