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

This paper uses confidential microdata from the Census of Services to examine lawfirms' field boundaries. We find that the share of lawyers working in field-specializedfirms increases as market size increases and lawyers field-specialize, indicating thattransaction costs among lawyers, and not just complementarities in clients’ demands,affect law firms’ field boundaries. Moreover, we find that this pattern is mainly true whenlooking at fields where lawyers are involved in dispute resolution rather than instructuring transactions. We then analyze which combinations of specialists tend to workin the same firm and which tend not to do so. We relate our results to theories of lawfirms’ boundaries from the organizational economics literature. Our evidence leads us toeliminate risk-sharing as an important determinant of firms’ field boundaries and narrowsthe set of possible monitoring or knowledge sharing explanations.[...]