Horizontal Diversification and Vertical Contracting: Firm Scope and Asset Ownership in Taxi Fleets

Evan Rawley and Timothy Simcoe

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: This paper considers the vertical implications of horizontal diversification. Many studies have documented organizational problems following corporate diversification. We propose that selective vertical dis-integration � shifting asset ownership to agents � can mitigate rent-seeking and coordination failures in the diversified firm. We test this proposition in a particularly simple setting that allows us to isolate the effects of interest and control for the likely endogeneity of diversification: taxi fleets that diversify into the limousine, or black car, segment following a wave of entry deregulation in the early 1990s. The results show that taxi fleets are substantially more likely to use owner-operator drivers following diversification. Moreover, diversified fleets that use a greater share of owner operators are more productive than diversified fleets that own most of their vehicles. We interpret these findings as evidence that firms re-organize in response to the challenges of diversification, and that there are causal links between the horizontal and vertical boundaries of the fleet.

Pages: 38 pages
Date: 2008-05
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https://www2.census.gov/ces/wp/2008/CES-WP-08-10.pdf First version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:08-10

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