Diversification and Outsourcing in the Taxicab Industry

This paper studies the origins of diseconomies of scope, and how firms reorganize following diversification to manage scope diseconomies. Specifically, we propose that outsourcing, or vertical dis-integration, can alleviate diseconomies of scope. We also examine the mechanisms underlying diseconomies of scope, showing that alternative theories lead to contrasting predictions about how within-firm task heterogeneity mediates the link between diversification and outsourcing. We test these propositions using micro-data on taxicab and limousine fleets from the Economic Census. The results show that taxicab fleets outsource, by shifting towards owner- operator drivers, when they diversify into the limousine business. Moreover, the magnitude of this shift toward driver ownership is larger in less urban markets, where the tasks of taxicab and limousine drivers are similar, but compensation systems differ. The findings suggest that: (1) firms use outsourcing to manage diseconomies of scope; and (2) that social comparison costs are an important source of diseconomies of scope in related diversification.