Working Paper: CEPR ID: DP3699
Authors: Luis Garicano; Thomas Hubbard
Abstract: What is the role of firms and markets in mediating the division of labour? This Paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We first examine how the specialization of lawyers and firms increases as lawyers' returns to specialization increase. In fields where lawyers increasingly specialize with market size, the relationship between the share of lawyers who work in a field-specialized firm and market size indicates whether firms or markets more efficiently mediate relationships between lawyers in this and other fields. We then examine which pairs of specialists tend to work in the same versus different firms; this provides evidence on the scope of firms that are not field-specialized. We find that whether firms or markets mediate the division of labour varies across fields in a way that corresponds to differences in the value of cross-field referrals, consistent with Garicano and Santos' (2001) proposition that firms facilitate specialization by mediating exchanges of economic opportunities more efficiently than markets.
Keywords: economics; organization; industry structure; law firms; legal services; specialization; theory of the firm
JEL Codes: D20; L10; L20; L80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market size (L25) | specialization among lawyers (K29) |
| market size (L25) | share of lawyers specializing in a field (K39) |
| market size (L25) | share of lawyers working in specialized firms (ex ante fields) (L84) |
| market size (L25) | share of lawyers working in specialized firms (ex post fields) (L84) |
| firms mediate relationships (L14) | share of lawyers working in specialized firms does not increase with market size (ex ante fields) (L19) |
| markets mediate relationships (D40) | share of lawyers working in specialized firms increases with market size (ex post fields) (L25) |