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  -