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When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms

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  • James B. Rebitzer
  • Lowell J. Taylor

Abstract

We study the economics of employment relationships through theoretical and empirical analysis of an unusual set of firms, large law firms. Our point of departure is the "property rights" approach that emphasizes the centrality of ownership's legal rights to control important, non-human assets of the enterprise. From this perspective, large law firms are an interesting and potentially important object of study because the most valuable assets of these firms take the form of knowledge - particularly knowledge of the needs and interests of clients. We argue that the two most distinctive organizational features of large law firms, the use of "up or out" promotion contests and the practice of having winners become residual claimants in the firm, emerge naturally in this setting. In addition to explaining otherwise anomalous features of the up-or-out partnership system, this paper suggests a general framework for analyzing organizations where assets reside in the brains of employees.

Suggested Citation

  • James B. Rebitzer & Lowell J. Taylor, 2006. "When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms," NBER Working Papers 12583, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12583
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    Cited by:

    1. Lewis Evans & Graeme Guthrie & Neil Quigley, 2012. "Contemporary Microeconomic Foundations for the Structure and Management of the Public Sector," Treasury Working Paper Series 12/01, New Zealand Treasury.
    2. Heski Bar-Isaac, 2007. "Something to prove: reputation in teams," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 495-511, June.
    3. Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2006. "Corporate Governance and the Plight of Minority Shareholders in the United States before the Great Depression," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 125-152, National Bureau of Economic Research, Inc.
    4. Radoslawa Nikolowa & Daniel Ferreira, 2018. "How to Sell Jobs," Working Papers 846, Queen Mary University of London, School of Economics and Finance.
    5. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    6. Braz Camargo & Elena Pastorino, 2016. "Learning-by-Employing: The Value of Commitment under Uncertainty," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 581-620.
    7. Gadi Barlevy & Derek Neal, 2019. "Allocating Effort and Talent in Professional Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 37(1), pages 187-246.
    8. Maija Halonen‐Akatwijuka, 2010. "Organizational Design, Technology and the Boundaries of the Firm," Economica, London School of Economics and Political Science, vol. 77(307), pages 544-564, July.
    9. Ola Kvaløy & Trond E. Olsen, 2008. "Relative Performance Evaluation, Agent Hold-up and Firm Organization," NBER Chapters, in: Organizational Innovation and Firm Performance, pages 229-241, National Bureau of Economic Research, Inc.
    10. Picariello, Luca, 2017. "Organizational Design with Portable Skills," Discussion Paper Series in Economics 2/2017, Norwegian School of Economics, Department of Economics.
    11. Ann Bartel & Brianna Cardiff-Hicks & Kathryn Shaw, 2013. "Compensation Matters: Incentives for Multitasking in a Law Firm," NBER Working Papers 19412, National Bureau of Economic Research, Inc.
    12. Rauch, James E., 2016. "Dynastic entrepreneurship, entry, and non-compete enforcement," European Economic Review, Elsevier, vol. 86(C), pages 188-201.
    13. Cathrine Filstad & Petter Gottschalk, 2009. "How Knowledge Organizations Work: The Case of Real Estate Agencies," International Real Estate Review, Global Social Science Institute, vol. 12(1), pages 88-97.
    14. Naomi Lamoreaux & Jean-Laurent Rosenthal, 2004. "Corporate Governance and the Plight of Minority Shareholders in the United States Before the Great Depression," NBER Working Papers 10900, National Bureau of Economic Research, Inc.
    15. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.
    16. Lehmann, Jee-Yeon, 2011. "Job assignment and promotion under statistical discrimination: evidence from the early careers of lawyers," MPRA Paper 33466, University Library of Munich, Germany.
    17. Michael Dinerstein & Isaac M. Opper, 2022. "Screening with Multitasking," CESifo Working Paper Series 9869, CESifo.
    18. Ferreira, Daniel & Nikolowa, Radoslawa, 2024. "Prestige, promotion, and pay," LSE Research Online Documents on Economics 118369, London School of Economics and Political Science, LSE Library.
    19. Alex Gershkov & Jianpei Li & Paul Schweinzer, 2009. "Efficient tournaments within teams," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 103-119, March.
    20. Nuno Garoupa & Fernando Gómez, 2002. "Cashing by the hour: Why large law firms prefer hourly fees over contingent fees," Economics Working Papers 639, Department of Economics and Business, Universitat Pompeu Fabra.
    21. Michael Schwarz & Sergei Severinov, 2009. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," NBER Working Papers 15136, National Bureau of Economic Research, Inc.
    22. Michael Schwarz & Sergei Severinov, 2010. "Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?," Journal of Labor Economics, University of Chicago Press, vol. 28(4), pages 893-922, October.
    23. Paul Oyer & Scott Schaefer, 2012. "Firm/Employee Matching: An Industry Study of American Lawyers," NBER Working Papers 18620, National Bureau of Economic Research, Inc.
    24. Bardsley, Peter & Erkal, Nisvan & Nikiforakis, Nikos & Wilkening, Tom, 2013. "Recursive contracts, firm longevity, and rat races: An experimental analysis," European Economic Review, Elsevier, vol. 61(C), pages 217-231.
    25. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • J4 - Labor and Demographic Economics - - Particular Labor Markets
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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