Diversification, diseconomies of scope, and vertical contracting: Evidence from the taxicab industry

摘要

The paper develops an exclusive theoretical framework wherein scope diseconomies link the horizontal and vertical boundaries of the firm. This framework is used for an empirical analysis of outsourcing, or vertical disintegration, in response to diversification. The main finding is that diseconomies of scope cause diversifying firms to outsource those activities which were carried out earlier by the organization since they are costly to manage within the new organizational setup. Outsourcing is linked to diversification by suggesting that coordinating activities across multiple divisions can increase the cost of managing an activity in-house. The framework suggests that firms will diversify and outsource when diversification creates net benefits to the firm. Three theories of corporate governance are used to explain why internal costs increase with firm scope. 1.First, diversification may increase monitoring costs that arise from incomplete information. 2.Second, diversification may increase influence costs, which arise when divisions engage in gain conflicting incentives. 3.Third, diversification may increase social comparison costs when employees in a multidivisional firm perceive disparities in the compensation within the organization.