Diversification, Vertical Contracting and Diseconomies of Scope: Evidence from the Taxicab Industry

39 Pages Posted: 20 Feb 2010

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

Date Written: February 19, 2010

Abstract

This paper studies how firms reorganize following diversification. We propose that firms use outsourcing, or vertical dis-integration, to reduce scope-induced governance costs that arise following diversification. We also consider the source of scope diseconomies, and argue that different underlying mechanisms generate contrasting predictions about the link between within- firm task heterogeneity and the incentive to outsource following diversification. We test these propositions using micro-data on taxicab and limousine fleets from the Economic Census. The results show that taxicab fleets outsource, by shifting towards owner-operator drivers, when they diversify into the limousine business. Moreover, the magnitude of this shift toward driver ownership is larger in less urban markets, where the tasks of taxicab and limousine drivers are similar, but compensation systems differ. The findings suggest that: (1) firms use outsourcing to manage diseconomies of scope; and (2) that inter-divisional conflicts are an important source of scope diseconomies in related diversification.

Keywords: Diversification, diseconomies of scope, adaptation, outsourcing, asset ownership.

JEL Classification: D2, L22, L23, L9,

Suggested Citation

Rawley, Evan and Simcoe, Timothy S., Diversification, Vertical Contracting and Diseconomies of Scope: Evidence from the Taxicab Industry (February 19, 2010). Available at SSRN: https://ssrn.com/abstract=1555888 or http://dx.doi.org/10.2139/ssrn.1555888

Evan Rawley

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

19th Avenue South
Minneapolis, MN 55455
United States

Timothy S. Simcoe (Contact Author)

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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