Managerial Leverage Is Limited By the Extent of the Market:Hierarchies, Specialization, and the Utilization of Lawyers’ Human Capital

This paper examines hierarchies’ role in the organization of human-capital-intensive productionWe develop an equilibrium model of hierarchical organization, then provide empirical evidenceusing confidential data on thousands of law offices from the 1992 Census of Services. We showhow the equilibrium assignment of individuals to hierarchical positions varies with the degree towhich their human capital is field-specialized, then show how this equilibrium changes with theextent of the market. When the extent of the market increases, individuals’ knowledge becomesnarrower, but deeper. Managerial leverage, the number of workers per manager, optimallyincreases to exploit this depth. We find empirical evidence consistent with a central propositionof the model: the share of lawyers that work in hierarchies and the ratio of associates to partnersincreases as market size increases and lawyers field-specialize. Other results provide evidenceagainst alternative interpretations that emphasize unobserved differences in the distribution ofdemand or “firm size effects,” and lend additional support to the view that a role hierarchies playin legal services is to help exploit increasing returns associated with the utilization of humancapital.[...]