The American law firm has some unusual labor practices. Junior employees, recruited and cultivated at great effort and expense to the firm, either make partner after years of hard work, or they're asked to leave -- if they haven't yet done so on their own -- at which time they're replaced by another fleet of young lawyers.
Up to now, many economists have argued that the privileges and financial rewards of partnership drive the fearsome up-or-out competition. The quest for partnership is like an elimination tournament, the theory goes, which pushes young lawyers to invest time and energy developing valuable skills. Partners can wield the up-or-out mechanism as both carrot (i.e. "you made partner!") and stick (i.e. "you're fired!"), assuring that ambitious associates work their tails off to become productive lawyers.
But economists James Rebitzer and Lowell Taylor explain the up-or-out system differently. For them, the system is a natural solution to a property-rights problem. Law firms, in their view, contend with a constant challenge: protecting their only real assets, relationships with clients. And any dissatisfied attorney can, at least theoretically, walk away with those assets by stealing clients. That's why firms need to jettison top attorneys whom they aren't letting into the partnership.
In their new paper, When Knowledge Is an Asset, to be published next year in the Journal of Labor Economics, Messrs. Rebitzer and Taylor argue that it's law-firm partners' desire to protect their "knowledge assets" that maintains the law firms' unusual and fragile labor structure.