TY - JOUR AU - Garicano, Luis AU - Hubbard, Thomas N TI - The Return to Knowledge Hierarchies JF - National Bureau of Economic Research Working Paper Series VL - No. 12815 PY - 2007 Y2 - January 2007 DO - 10.3386/w12815 UR - http://www.nber.org/papers/w12815 L1 - http://www.nber.org/papers/w12815.pdf N1 - Author contact info: Luis Garicano Departments of Management and Economics and Centre for Economic Performance London School of Economics Houghton Street London WC2A 2AE United Kingdom E-Mail: luis.garicano@ie.edu Thomas N. Hubbard Global Hub 4253 Kellogg School of Management Northwestern University Evanston, IL 60208 Tel: 773/834-4074 Fax: 773/702-0458 E-Mail: t-hubbard@kellogg.northwestern.edu AB - 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. ER -