Related Diversification and Outsourcing in the Taxicab Industry

32 Pages Posted: 30 Apr 2008 Last revised: 1 Oct 2012

See all articles by Evan Rawley

Evan Rawley

University of Minnesota - Twin Cities - Carlson School of Management

Timothy Simcoe

Boston University - Questrom School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: April 6, 2009

Abstract

This paper studies how firms reorganize after diversifying into related businesses. Specifically, we propose that outsourcing is one way to reduce the coordination costs that arise in multidivisional firms. We, also, examine the mechanisms underlying coordination costs, and show how alternative theories lead to contrasting predictions about the link between diversification and outsourcing. We test these propositions using novel micro-data on taxicab and limousine firms from the Economic Census. The results show that taxicab fleets outsource, by shifting ownership of taxicabs to drivers, when they diversify into the limousine business. Moreover, the magnitude of the shift toward driver ownership is larger for firms in less urban markets, where the tasks of taxicab and limousine drivers are similar, but compensation systems differ. These findings suggest that firms use outsourcing to mitigate coordination costs associated with related diversification, particularly when employees in different divisions have heterogeneous incentives or ability but perform similar tasks.

Keywords: Diversification, Outsourcing, Vertical Integration

JEL Classification: L14, L22, L23, L92

Suggested Citation

Rawley, Evan and Simcoe, Timothy S., Related Diversification and Outsourcing in the Taxicab Industry (April 6, 2009). Available at SSRN: https://ssrn.com/abstract=1126678 or http://dx.doi.org/10.2139/ssrn.1126678

Evan Rawley (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Timothy S. Simcoe

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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