Luis Garicano and Thomas Hubbard
December 6, 2001
Since Adam Smith’s famous ‘pin factory’ fable, economists have been preoccupied with the role that specialization and the division of labor play in economic growth. Surprisingly, however, this recognition of the fundamental impact that specialization plays in economic growth has not led to much systematic empirical work on the organization of specialization. In fact, no systematic empirical work has illuminated such questions as:
When do individuals specialize and how does this relate to the complexity of activities?
When do specialists work within the same firm, and when do they work in different firms?
When is specialization limited by the extent of the market, and when and why is it limited by other factors such as coordination costs? What role do hierarchies play in facilitating specialization? What accounts for differences in hierarchical forms; for example, when do hierarchies tend to be steep versus flat?
Empirical evidence on these and other related questions is important for understanding a wide range of issues in industrial organization and labor economics. These issues include: how will new communication technologies such as the internet affect firm size, how does firms’ organizational structure relate to their service offerings, and how will the on-going diffusion of information technology affect the demand for specialized skills and thus wage inequality.
The legal services industry has features that are ideally suited to study these questions. Law firms are the ultimate human capital-based organizations: no important physical assets are involved in the provision of legal services, apart from widely available reference materials such as legal databases. In this context, the organization of the acquisition and use of knowledge required to solve clients problems is the key issue that lawyers face. As a result, the organization of legal services is likely to reflect directly the costs and benefits of specialization.
Every five years as part of the Census of Services, the Bureau of the Census asks every law firm with employees questions about the specialties of lawyers within the firm and the number of individuals who are partners, associate lawyers, paralegals, and non-legal staff. These data therefore contain detailed, firm-level information about specialization and hierarchies within professional service firms, and offer a unique opportunity to study questions such as those described above in an ideal context. In this project description, we first discuss our methodology. We start by formulating our research questions and theoretical grounding for these questions. We also present our preliminary findings from current work using market-level data, the limitations of these data, and how we expect to expand on our analysis through the use of the firm-level microdata. We next describe our projected data sources. Last, we discuss the statistical output we expect to generate.
I. Research Questions and Methodology
Our research aims to study the organization of specialization in legal services. This involves two general sets of issues. The first one concerns the relationship between specialization and firms’ boundaries: when is it efficient for specialists to work within the same firm versus different firms? The second concerns hierarchies within firms: Conditional on firms’ boundaries, how many lawyers should be partners versus associates and how should relative wages at different hierarchical levels relate to the form of the hierarchy?
1. Specialization and Firms’ Boundaries
Consider a law firm with clients that encounter a set of problems in a wide array of legal fields, for example bankruptcy, contracts, environmental, regulation, etc. In some instances, the law firm will have the expertise...