When knowledge is an asset: Explaining the organizational structure of large law firms

We study the economics of employment relationships in large law firms. Our point of departure is the "property-rights" approach that emphasizes the centrality of ownership's legal rights to control significant nonhuman assets of the enterprise. From this perspective, law firms are an interesting object of study because the key asset in these firms is knowledge, particularly knowledge of the needs and interests of clients. We argue that two distinctive organizational features of 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.