Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms

What is the role of firms and markets in mediating the division of labor? 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 labor 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. *University of Chicago Graduate School of Business and CEPR **University of Chicago Graduate School of Business and NBER Thanks to Rob Gertner, Jack Heinz, Ed Laumann, Kevin Murphy, Bob Nelson, and Tano Santos for useful discussions, and to the Chicago GSB and the Kaufmann Foundation for support. The research in the paper was conducted while the authors were Census Bureau research associates at the Washington 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.