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Unformatted text preview: Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information By G EORGE P. B AKER AND T HOMAS N. H UBBARD * Explaining patterns of asset ownership 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 re- source-allocation-improving features pushed them toward for-hire carriage. We con- clude that ownership patterns in trucking reflect the importance of both incomplete contracts and of job design and measurement issues. ( JEL D23, L14, L22, L23, L92) Understanding the patterns of asset owner- ship in the economy is a central goal of both organizational economics and industrial organi- zation because it provides insights on firm boundaries and industry structure. Major progress towards this goal was provided by Sanford Grossman and Oliver Hart’s seminal paper in 1986, which argues that asset owner- ship confers on owners residual rights of control that give them power and thus incentives to devote effort to value-increasing activities. In this view, firms’ boundaries are determined by the optimal allocation of these residual rights of control. Bengt Holmstrom and Paul Milgrom (1994), however, argue that firms’ boundaries reflect trade-offs in which asset ownership in- teracts with job design and other organizational decisions. If so, firms’ boundaries may reflect factors that do not appear in Grossman and Hart’s (1986) theory, including those that affect the optimal allocation of tasks across individu- als. In 1999, Holmstrom offered a critique of the property rights view in which he argues that it fails to explain why firms rather than individu- als own assets. He extends the insight from the 1994 paper to argue that firms own assets pre- cisely because this mutes the incentives that come with individual asset ownership, allowing the firm to operate as a “subeconomy” that can more precisely balance incentives and imple- ment more complex multitask job designs. In this paper, we argue that the pattern of asset ownership in trucking—in particular the decision by shippers about whether to use their internal fleet of trucks for a haul or contract with for-hire carriers—reflects not only the factors identified in Grossman and Hart’s theory, but also those highlighted in Holmstrom and Mil- grom (1994). Consistent with the former, own- ership patterns reflect trade-offs that arise from providing intermediaries strong incentives to identify profitable uses for trucks. Consistent with the latter, ownership patterns also reflect issues of job design: i.e., the degree to which drivers simply drive trucks, or provide a more complex combination of transportation and...
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This note was uploaded on 02/20/2009 for the course AEM 4240 taught by Professor Blalock,g. during the Fall '07 term at Cornell University (Engineering School).
- Fall '07