Law & Economics Working Papers
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly involved in structuring transactions or in dispute resolution. We then analyze which types of specialists tend to work in the same firm and which tend not to do so. Our evidence leads us to eliminate risk-sharing as an important determinant of firms' field boundaries, and narrows the set of possible monitoring or knowledge sharing explanations. Our findings show how the incentive trade-offs associated with exploiting increasing returns from specialization help lead the structure of the industry to be fragmented, but highly skewed.
Thomas N. Hubbard & Luis Garicano, "Specialization, Firms, and Markets: The Division of Labor within and between Law Firms" (John M. Olin Program in Law and Economics Working Paper No. 213, 2004).