Asset ownership & incentives to undertake non-contractible actions: The case of trucking

Abstract

Firms must continually adjust their operations and those of their supply chain members in response to a continually evolving external environment. Many of these modifications are non-contractible in that firms cannot devise and enforce contracts on these behaviors. In this research, we extend property rights theory of the firm (PRTF) by suggesting that small entrepreneurs’ ownership of assets used to perform delegated tasks does not always incentivize small entrepreneurs to undertake non-contractible actions (NCAs) as assumed by canonical PRTF. We argue that the ability of asset ownership to incentivize small entrepreneurs to undertake NCAs will be muted when undertaking NCAs reduces small entrepreneurs’ productivity. We test our hypotheses by examining how trucking companies’ use of independent contractors affected the rate at which they improved compliance with different types of safety rules following a major regulatory change. Consistent with our arguments, we find that the use of independent contractors slowed carriers’ rate of firm-wide improvement on compliance with hours-of-service and vehicle maintenance rules relative to driving safety rules. These results, which remain after extensive robustness testing, have important implications for theory and practice.