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

  • Evan Rawley
  • Timothy Simcoe
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    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.

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    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 08-10.

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    Length: 38 pages
    Date of creation: May 2008
    Date of revision:
    Handle: RePEc:cen:wpaper:08-10
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