The Organization of Knowledge-Intensive Production: Hierarchies and Specialization in Legal Services

What role do hierarchies play with respect to the organization of production and what factors determine their structure? Despite hierarchies’ pervasiveness in the economy, there has been little or no systematic empirical work on these issues. This paper examines these issues, focusing on legal services in the United States. We first provide some stylized facts and discuss how they cannot be accommodated within several existing views of hierarchies. We then develop an equilibrium model in which hierarchies’ role is to permit vertical specialization, enabling experts to specialize in problems they have a comparative advantage in addressing. We test the propositions from the theory using a unique data set: confidential data on thousands of law offices from the 1992 Census of Services. Our results are consistent with the view that a role of hierarchies is to help exploit increasing returns associated with human capital. *University of Chicago Graduate School of Business and CEPR **University of Chicago Graduate School of Business and NBER We thank Jim Brickley, Paul Oyer, Pedro Vicente, and many seminar participants for useful comments. The research in the paper was conducted while the authors were Census Bureau 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.