Organization and Inequality in a Knowledge Economy*

Abstract

We present an equilibrium theory of the organization of work in an economy where knowledge is an essential input in production and agents are heterogeneous in skill. Agents organize production by matching with others in knowledge hierarchies designed to use and communicate their knowledge efficiently. Relative to autarky, organization leads to larger cross-sectional differences in knowledge and wages: low skill workers learn and earn relatively less. We show that improvements in the technology to acquire knowledge lead to opposite implications on wage inequality and organization than reductions in communication costs. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.