Thomas N. Hubbard

Contractual form and market thickness in trucking

A central proposition of the transaction costs literature is that firms will substitute more complicated contractual arrangements for simple spot arrangements when transactions involve relationship-specific investments. I investigate this proposition by testing whether simple spot arrangements are less common when local trucking markets are thin. 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 for which quasi-rents are particularly small. Contracts protect quasi-rents over a surprisingly large range, but they play a less important role as quasi-rents decrease. Copyright 2001 by the RAND Corporation.

Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital

This paper examines the role of hierarchies in the organization of human‐capital‐intensive production. We develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices. The equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization, which increases as the extent of the market increases. As individuals’ knowledge becomes narrower but deeper, managerial leverage—the number of workers per manager—optimally increases to exploit this depth. Consistent with our model, the share of lawyers who work in hierarchies and the ratio of associates to partners increase 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, in legal services, hierarchies help exploit increasing returns associated with the utilization of human capital.

How Wide Is the Scope of Hold-Up-Based Theories of Governance? Shipper-Carrier Relationships in Trucking

Previous researchers have established that hold-up-based theories of governance (Klein, Crawford, and Alchian (1978), Williamson (1979, 1985)) can have predictive power. The scope of their predictive power is an outstanding empirical issue. I investigate this in the context of trucking. The nature and degree of relationship-specific investments differs for short and long hauls. I find that long-term contracts are used more relative to spot arrangements when local markets are thin for long hauls, but not short hauls. For long hauls, the relationship between governance and local market conditions is strongest in states in which inbound markets are thin. The predictive scope of the theories extends beyond circumstances where investments are large and sunk over long horizons, but not to those where quasi-rents are small and appear only in the very short run.

When Demand Increases Cause Shakeouts

Standard economic models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton’s (1991) model illustrates that in some cases, demand increases can catalyze competitive responses that bring about shake-outs. This paper provides empirical evidence of this effect in the 1960s-1980s hotel and motel industry, an industry where quality competition increasingly took the form of whether firms supplied outdoor recreational amenities such as swimming pools. We find that openings of new Interstate Highways are associated with increases in hotel employment, but decreases in the number of firms, in local areas. We further find that while highway construction is associated with increases in hotel employment in both warm and cold places, it only leads to fewer firms in warm places (where outdoor amenities were more valued by consumers). Finally, we find no evidence of this effect in other industries that serve highway travelers, gasoline retailing or restaurants, where quality competition is either less important or quality is supplied more through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between “natural” and “market-power-driven” increases in concentration.