The Returns to Knowledge Hierarchies

Hierarchies allow individuals to leverage their knowledge through others’time. This mechanism increases productivity and ampli…es the impact of skill heterogeneity on earnings inequality. This paper analyzes the earnings and organization of U.S. lawyers and uses an equilibrium model of knowledge hierarchies inspired by Garicano and Rossi-Hansberg (2006) to assess how much lawyers’productivity and the distribution of earnings across lawyers re‡ects lawyers’ability to organize problemsolving hierarchically. Our estimates imply that hierarchical production leads to at least a 30% increase in productivity in this industry, relative to a situation where lawyers within the same o¢ ce do not “vertically specialize.”We further …nd that it ampli…es earnings inequality, mostly by increasing the earnings of the very highest percentile lawyers in business and litigation-related segments. We thank Pol Antras, Matthew Gentzkow, Lars Nesheim and Esteban Rossi-Hansberg and participants at various seminars, the 2006 Summer Meetings of the Econometric Society, and NBER Summer Institute for comments and suggestions. We are especially grateful to Steve Tadelis, who presented this paper and o¤ered extensive comments at the latter, and to the Editor and referees at this journal. The research in this 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 ensure that no con…dential data are revealed.