Working Paper: CEPR ID: DP6077
Authors: Luis Garicano; Thomas Hubbard
Abstract: 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
Keywords: hedonics; hierarchy; matching; scale of operations; effects; sorting; structural estimation
JEL Codes: D31; J31; J41; L22; L23; L84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hierarchical production (D20) | Increased productivity (O49) |
| Hierarchical production (D20) | Increased earnings inequality (D31) |
| Increased productivity (O49) | Increased earnings of highest-earning lawyers (K41) |
| Hierarchical production (D20) | Enhanced overall productivity and income distribution (O49) |
| Organizational structure (hierarchical production) + Distribution of skill among lawyers (L23) | Increased productivity and income distribution (O49) |