The Return 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. To quantify this e¤ect, 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 re‡ects 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 let us infer how much production would be lost and how much the earnings distribution would change if lawyers were not able to “vertically specialize.”We …nd that the impact of hierarchy on productivity and earnings distributions is substantial but not dramatic, re‡ecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized. 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.