Working Paper: CEPR ID: DP12923
Authors: Laura Alfaro; Nicholas Bloom; Paola Conconi; Harald Fadinger; Patrick Legros; Andrew Newman; Raffaella Sadun; John Van Reenen
Abstract: We jointly study firm boundaries and the allocation of decision rights within them byconfronting an incomplete-contracts model with data on vertical integration and delegationfor thousands of firms around the world. Integration has an option value: it confersauthority to delegate or centralize decision rights, depending on who can best solve problemsthat arise in the course of an uncertain production process. The model can explainwhy more vertically integrated firms tend to delegate more, as observed in our data. Inline with the model’s predictions, we find that firms are more likely to integrate suppliersthat produce more valuable inputs and operate in industries with more dispersed productivity,and that firms delegate more decisions to integrated suppliers that produce morevaluable inputs and operate in more productive industries.
Keywords: vertical integration; decentralization; real options; supply assurance
JEL Codes: D2; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vertical integration (L22) | delegation (M54) |
| input value (D46) | vertical integration (L22) |
| input value (D46) | delegation (M54) |
| riskiness of input industry (L99) | vertical integration (L22) |
| riskiness of input industry (L99) | delegation (M54) |