615 Leverone Hall
My main focus is empirical research in industrial organization. I am currently working on several projects that the organization of firms and markets.
Industry Dynamics and Demand Shifts
My current project (with Jeff Campbell) uses the construction of the Interstate Highway System to investigate industry structure dynamics and demand shifts. The first paper is below. It investigates how the number and size distribution of service stations changes with the completion of Interstate highways, and how this differs depending on the distance between the new Interstate and the old route (i.e., the size of the spatial demand shift). We find that the margin and timing of the industry structure adjustment differs with the size of the spatial shift: when there is no shift, you see larger stations, not more stations, and the change takes place two years before the highway opens. When there is a significant (say, 10 mile) shift, you see more stations, not as much larger stations, and the change takes place the year the highway opens. We relate these results to monopolistic competition theories, and discuss what they have to say about the benefits and costs of capacity commitments in this context.
Earnings Inequality, Productivity, and Hierarchical Organization
My previous project measures how much hierarchical organization affects productivity and earnings inequality. If hierarchies allow individuals to leverage their knowledge through others’ individuals’ time, they should affect both productivity and earnings inequality. They should increase productivity by allowing individuals to better specialize (experts specializing in hard problems, others specializing in mundane ones). They should also amplify the earnings inequality that would be obtained through only differences in skill and luck.
Luis Garicano and I have written several papers that investigate this phenomenon in the context of legal services. This research exploits confidential microdata from the Census of Services.
Our earliest work on this agenda was entitled "Learning About the Nature of Production from Equilibrium Assignment Patterns." This paper examines theoretically how different classes of production functions generate different equilibrium assignments of individuals into workgroups, then uses the aforementioned Census data to investigate the form that the production function in legal services should take to rationalize earnings and organizational patterns. This paper is forthcoming in the Journal of Economic Behavior and Organization.
Another paper is entitled “The Return to Knowledge Hierarchies.” This paper proposes a “hierarchical production function” with microfoundations in Garicano’s (2000) theory of knowledge-based hierarchies. We derive equilibrium assignment patterns that are implied by hierarchical production functions and test them using data from law offices in 1992. We then develop a methodology that allows for the structural estimation of the parameters of hierarchical production functions. Finally, we use this method to estimate how much hierarchical production affects productivity and earnings inequality in legal services in 1992. We find that hierarchical organization increases productivity by at least one-third, and substantially increases earnings inequality among lawyers during this time.
A third, “Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms,” investigates how much organizational efficiencies have affected earnings inequality among lawyers between 1977 and 1992. We first estimate the earnings distribution among lawyers during this time, and find that inequality increased substantially, especially at the top. We then apply the methodology of our earlier work, and find evidence that coordination costs associated with hierarchical production (the time cost of using associates) declined steadily during this time. Finally, we use these estimates to back out how much increases in earnings inequality among lawyers reflect lawyers’ organizational response to these new efficiencies versus other factors such as skill-biased demand changes. We find that the majority of increases in earnings inequality among top lawyers reflect lawyers’ responses to these new efficiencies. However, most of the increase in inequality between top lawyers and other lawyers reflect other factors.
Specialization and Organization in Legal Services
A central problem in the economics of organization is matching opportunities to individuals that have a comparative advantage in exploiting them. Markets match opportunities to individuals, but other organizational forms do so as well. Organizational forms that facilitate good matches encourage individuals to specialize, thereby encouraging growth through greater division of labor.
Luis Garicano and my first work on the lawyers data investigated the role of firms and hierarchies play in facilitating matches in the context of legal services.
One paper is entitled "Managerial Leverage Is Limited by the Extent of the Market: Theory and Evidence from the Legal Services Industry." This presents a theory that ties optimal hierarchies to the degree to which individuals field-specialize, and examines the hierarchical organization of lawyers in light of this theory. (This paper was previously circulated as "Hierarchies, Specialization, and Increasing Returns to Knowledge: Theory and Evidence from the Legal Services Industry.") This paper was published in the Journal of Law and Economics in February 2007.
The initial paper is entitled "Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms." This investigates the determinants of law firms' horizontal boundaries. The link below is to a version dated June 2007. This version updates a previous draft that was issued as an NBER working paper.
There are also two smaller pieces. One, "Firms' Boundaries and the Division of Labor: Empirical Strategies," was published in the Journal of the European Economic Association. Another, "Hierarchical Sorting and Learning Costs: Evidence From the Law," was published in the Journal of Economic Behavior and Organization.
Information, Technology, Organization, and Productivity in the
Much of my research from a few years ago examines relationships between technological and organizational change in the trucking industry. There are several papers in this research agenda. Versions of all of these are also available as NBER working papers.
One, co-authored with George Baker, is entitled "Make or Buy in Trucking: Asset Ownership, Job Design, and Information." This examines how the diffusion of on-board computers have affected shippers' decision whether to use internal divisions or for-hire carriers to transport goods. We find that firms' boundaries reflect both the appropriation issues identified by Grossman and Hart (1986) and the job design and measurement cost issues highlighted in Holmstrom and Milgrom (1994). We also find that OBCs' incentive-improving capabilities have different effects on firms' boundaries from their resource-allocation-improving capabilities; the former leads to larger, more integrated firms, the latter leads to smaller, less integrated firms.
This paper appeared in the June 2003 issue of the American Economic Review.
Another paper, also co-authored with George Baker, is entitled "Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking." This tests how changes in the contracting environment affect firms' boundaries in the trucking industry by examining how on-board computer adoption affects whether truck drivers own the trucks they operate. This paper appeared in the November 2004 issue of the Quarterly Journal of Economics.
A third paper investigates how much OBCs have increased
productivity in the industry. I find evidence that OBCs have led to
sizable increases in capacity utilization -- at least 13% among adopters.
In the aggregate, the evidence suggests that OBCs have led to $16 billion in
benefits annually within the industry, and were non-trivial contributors to
overall economic growth in the
This paper appeared in the September 2003 issue of the American Economic Review.
Two earlier papers in this agenda have been published. One is "Contractual Form and Market Thickness in Trucking." This paper appeared in the Rand Journal of Economics, Summer 2001.
The first paper within this project is now titled "The Demand for Monitoring Technologies: The Case of Trucking." This paper appeared in the May 2000 issue of the Quarterly Journal of Economics.
Finally, "Governance Structure in the Deregulated Trucking Industry," is the predecessor to "Contractual Form..." but also analyzes changes in contracting between 1987 and 1992.
Ownership Incentives and Industry Structure
Below is an applied theory piece entitled "Affiliation, Integration, and Information: Ownership Incentives and Industry Structure." This is an attempt to build a bridge between two literatures in industrial organzation -- the market structure literature and the theory of the firm literature -- and shed insights on the question: what makes some industries necessarily fragmented? This is an interesting question in light of the fact that most industries, particularly non-manufacturing industries, are extremely fragmented. Anyway, the paper presents a canonical theoretical model and a series of case examples. The paper appeared in the June 2004 issue of the Journal of Industrial Economics.
Incentives in Expert Service Markets
Another part of my research concerns how the extent to which consumers are
informed about product quality affects equilibrium price and quality in
imperfectly competitive markets. This project is complementary to
previous work that I have done using data from vehicle inspections in
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All unpublished material Copyright Thomas N. Hubbard.
Old Class Materials
Below are links to materials I used for classes I taught in the economics department at UCLA. The graduate course materials includes discussion questions for many of the papers I covered in the course. All unpublished materials are copyright Thomas N. Hubbard, but individual teachers are welcome to use them for classroom purposes.
Other Economics Links
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