Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers’ Human Capital
University of Chicago
Northwestern University
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.
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Online publication date: 1-Jul-2009.
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Online publication date: 1-Mar-2009.
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We thank Jim Brickley, Rob Gertner, Bob Gibbons, Lynn Riggs, Paul Oyer, and Pedro Vicente as well as seminar participants at Brown University, Carnegie Mellon University, University of Chicago, Columbia University, Harvard University, Indiana University, Massachusetts Institute of Technology, University of Rochester, University of Toronto, University of California, Los Angeles, University of California, San Diego, the Wharton School, Yale University, and the American Economic Association meetings for their useful comments. The research in this paper was conducted while the authors were Bureau of the Census research associates at the Chicago Research Data Center. Research results and conclusions are those of the authors and do not necessarily indicate concurrence by the Bureau of the Census. This paper has been screened to insure that no confidential data are revealed. Luis Garicano is also affiliated with the Centre for Economic Policy Research. Thomas N. Hubbard is also affiliated with the National Bureau of Economic Research.