How Wide is the Scope of Hold-Up-Based Theories? Contractual Form and Market Thickness in Trucking

How far do the contractual implications of hold-up-based theories (Klein, Crawford, and Alchian (1978), Williamson (1979, 1985)) extend? I investigate this in the context of trucking. Quasi-rents in trucking are generally smaller than in the contexts studied in the previous empirical literature. They vary with hauls' distance and the thickness of local markets. I find that doubling the thickness of the market increases the likelihood that simple spot arrangements govern transactions by about 30% for long hauls. I find weaker evidence of relationships between local market thickness and contractual form for short hauls -- hauls for which quasi-rents are particularly small. Contracts' role as protectors of quasi-rents becomes less important as quasi-rents decrease, but exists over a surprisingly large range.

Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms

What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly involved in structuring transactions or in dispute resolution. Our evidence is consistent with hypotheses in which firms' boundaries reflect variation in the value of knowledge-sharing or in the costs of monitoring, but not in risk-sharing. Our findings show how the incentive trade-offs associated with exploiting increasing returns from specialization lead the structure of the industry to be fragmented, but highly-skewed.

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Services Industry

What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized, then show how this equilibrium changes with the extent of the market. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases as market size increases and lawyers field-specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or 'firm size effects,' and lend additional support to the view that a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

The Return to Knowledge Hierarchies

Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production in this industry, relative to a situation where lawyers within the same office do not "vertically specialize." We further find that it amplifies earnings inequality, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking

We investigate how the contractibility of actions affecting the value of an asset affects asset ownership. We examine this by testing how on-board computer (OBC) adoption affects truck ownership. We develop and test the proposition that adoption should lead to less ownership by drivers, particularly for hauls where drivers have the greatest incentive to drive in non-optimal ways or engage in rent-seeking behavior. We find evidence in favor: OBC adoption leads to less driver ownership, especially for long hauls and hauls that use specialized trailers. We also find that non-owner drivers with OBCs drive better than those without them. These results suggest that technology-enabled increases in contractibility may lead to less independent contracting and larger firms.

Make Versus Buy in Trucking: Asset Ownership, Job Design and Information

Explaining patterns of asset ownership in the economy is a central goal of both organizational economics and industrial organization. We develop a model of asset ownership in trucking, which we test by examining how the adoption of different classes of on-board computers (OBCs) between 1987 and 1997 influenced whether shippers use their own trucks for hauls or contract with for-hire carriers. We find that OBCs' incentive-improving features pushed hauls toward private carriage, but their resource-allocation-improving features pushed them toward for-hire carriage. We conclude that ownership patterns in trucking reflect the importance of both incomplete contracts (Grossman and Hart (1986)) and of job design and measurement issues (Holmstrom and Milgrom (1994)).

The state of our interstates

President Obama's budget proposal emphasizes the importance of infrastructure investments for the nation's economic health, so now seems a good time to assess the condition of our country's major roads.Express highways

Affiliation, Integration, and Information: Ownership Incentives and Industry Structure

This paper presents theory and evidence on horizontal industry structure, focusing on situations where plant-level scale economies are small and market power is not an issue. At issue is the question: what makes industries necessarily fragmented? The theoretical model distinguishes between the structure of brands and firms in an industry by examining trade-offs associated with affiliation and integration, and how they are affected by the contracting environment. I show how contractual incompleteness can lead industries to be necessarily fragmented. I also show that improvements in the contracting environment will tend to lead to a greater concentration of brands, but whether they lead industries to be more or less concentrated depends on what becomes contractible. I then discuss the propositions generated by the model through a series of case study examples.

Specialization, Firms, and Markets: The Division of Labor within and between Law Firms

What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms\u27 boundaries. We find that firms\u27 field scope narrows as market size increases and individuals specialize, indicating that firms\u27 boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly involved in structuring transactions or in dispute resolution. We then analyze which types of specialists tend to work in the same firm and which tend not to do so. Our evidence leads us to eliminate risk-sharing as an important determinant of firms\u27 field boundaries, and narrows the set of possible monitoring or knowledge sharing explanations. Our findings show how the incentive trade-offs associated with exploiting increasing returns from specialization help lead the structure of the industry to be fragmented, but highly skewed

Why Are Process Monitoring Technologies Valuable? The Use of On-Board Information Technology in the Trucking Industry

Recent advances in information technology (IT) have enabled firms in many industries to give middle managers new access to timely production data. Process monitoring' technologies give distant managers a window to production which can both lower their cost of monitoring subordinates and provide them better information toward allocating their firms' resources in the short term. This paper investigates where and why IT-based process monitoring is valuable within the trucking industry, distinguishing between its incentive- and coordination-related benefits. Using truck-level data, it examines how the use of on-board computers varies with characteristics of carriers, shippers, and hauls. It then analyzes these patterns in light of existing theory and relates them to how supply chains are organized.