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An empirical analysis of firm size and vertical integration in the motor carrier industry

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I. Introduction

Leasing of capital equipment as a form of vertical integration has been the subject of examination in recent studies that deal with the motor carrier industry in the United States. Cowen and Felton (1985) examine the "differential risk" faced in the market by common carriers and competing contract carriers since the passage of the Motor Carrier Act of 1980. They find that the percentage of total vehicle miles leased by common carriers (communal carriers) is approximately 2.5 times that of contract carriers, and this difference is partly explained by such "differential risk" as measured by earnings instability (exogenous demand shocks).

Using a different approach, Smith (199), Upadhyaya and Mixon (1993), and Mixon and Upadhyaya (1994) develop a leasing theory that builds upon the ideas of Williamson (1971, 1974, 1975, 1979) concerning the relevant human and market characteristics that lead to transactions costs and market failure, and often impede the contracting (leasing) process in many industries. Their empirical results suggest that leasing is more important to common carriers, and different types of leasing arrangements will arise under different sets of environmental and human characteristics.

Most of these approaches deal with demand stability (or instability) that these different types of motor carriers face in both the short-run and long-run. These approaches develop the theory of economic regulation of Stigler (1971) and Peltzman (1976), but not the theory of the nature of the firm (mainly firm size)--a theory originally developed by Coase (1937) and expanded by Alchian and Demsetz (1972). Our aim is to provide some statistical evidence that relates firm size (from a Coasian perspective) to the leasing of transport equipment in the motor carrier industry.

II. The Nature of the Firm and the Leasing Decision

In a seminal article, Ronald Coase (1937) developed the first theoretical discussions on the...